Where Does WinRAR extract files opened directly?

Winrar extracts the archives to

C:\Documents and Settings\<user_name>\Local Settings\Temp (Windows XP)
C:\Users\<user_name>\AppData\Local\Temp (Windows Vista/7)

by default, but I don't recommend you to edit an extracted file in a temp folder. Instead, extract the file (for example, to desktop), edit and save it, and then update the archive with the new file.

P.S.: You can change Winrar's default temp directory from Winrar's Options > Settings > Paths tab.