Located in the aqueduct that links Firelink Shrine to the Undead Burg. You will need to have unlocked the lower section before you can trade with her. From the Capra Demon Fog Gate, head down the stairs and follow the lane. Head up some stairs and into a tower and continue up. If visiting her for the first time, be sure to open the shortcut gate to Firelink Shrine at the other end of the aqueduct first, in case you forget to later.
The Undead Female Merchant sells a number of very nice items. Top pick, although a little expensive at 100 Souls each, are the Poison Arrows. These are extremely useful against a number of tough enemies early in the game and the only place you can get them from.
Charcoal Pine Resin (500 Souls) can also be very useful. It will add fire damage to your weapon. Again, the Undead Female Merchant is the only person who sells the item.