README.txt

This directory is reserved for core module files. Custom or contributed
modules should be placed in their own subdirectory of the sites/all/modules
directory. For multisite installations, they can also be placed in a subdirectory
under /sites/{sitename}/modules/, where sitename is the name of your site
(e.g., www.example.com). This will allow you to more easily update Drupal core files.

For more details, see: http://drupal.org/node/176043