Copy and Paste didn't make it into the first version of Windows Phone 7; however, it's currently being tested by the development team.
CNET managed to get a look at the feature after the Microsoft launch event today.
Copy and paste will work by letting users click on a particular word and then expand or contract their text selection from there. A separate paste icon will appear allowing users to paste text, though the look is not yet final.
It seemed to work well, if not quite as elegantly as what Apple has done on the iPhone. The good news is that it is indeed coming sooner rather than later. Although Microsoft is pitching its phones as the devices for the common user, copy and paste is important because it is one of those "check box" features that users look for, even if they never make use of it.