Well I installed the finally released Drupal 7 last night. It sure looks very slick and modern. I'm glad it is finally released but it does feel a little like having another child. I had a tough time trying to understand the new way of doing taxonomy. In Drupal 6, you just go to the vocabulary that you define (such as food - with terms like: chinese, japanese, southern, indian, bbq) and you specify which content type uses that vocabulary. When you add content, you can select terms from that vocabulary.
As best I can tell, the new improved way is to define your content type, go to the manage fields tab, add a field of type "Term Reference," specify the vocabulary (and the default value which is really nice) and you are done. You can see an example of this in my screen capture - it is the field "Category." When you go to add content you will be able to select the appropriate term. This Term Reference field is a lot like User Reference or Node reference where you could link one piece of content to another. Please comment if I have missed the obviously easier way to do this.