The search box is located directly above the reading panel to the right of the Google Reader logo. Users can search all subscribed feeds or search by category/ tag.
Google Readers biggest competitor Bloglines recently released a completely new version that has been getting positive coverage; adding search to Google Reader (a feature Bloglines has had since May 2006) shines the spotlight back in Google’s direction.
It may be completely unrelated, but at the time of writing anyway Google Reader is experiencing difficulties with showing read/ unread items in the reading panel, showing all items as unread since roughly the same time search went live. The sidebar list of tags though is working fine.