Hello,
If you already have a .prj file, add it to your Favorites location:
On XP,
C:\Documents and Settings\login\Application Data\ESRI\Desktop10.1\ArcMap\Coordinate Systems
On Win7:
C:\Users\login\AppData\Roaming\ESRI\Desktop10.1\ArcMap\ Coordinate Systems
If you want to create a new coordinate system, click the globe icon at top right (to the left of the star icon). To modify an existing coordinate system, right click it in the directory listing and choose "Copy and Modify".
If you want to modify a .prj file in Notepad or some other editing tool, you'll have to add it to Favorites first which will write the definition to a file.
Melita