Custom taxonomies in WordPress are exactly like categories and tags, except you can create more specialized groups. For example, I wanted to categorize the projects in my portfolio based on what technology I used (eg WordPress, PSD to HTML, Ruby on Rails). So I created a custom taxonomy called “Technology” (great article on how to do that here).
I wanted to create a template that showed each of my projects that belonged to a certain technology. To do that, I simply created a page called taxonomy-technology.php and used the code from the portfolio page (“technology” is the slug of the taxonomy I created). So now, you can see all my projects within a certain category (eg “PSD to HTML“). The URL for my PSD to HTML projects is /technology/psd-to-html. “technology/” tells WordPress to find the custom taxonomy page for the technology category and “psd-to-html” is the slug of the actual technology I want to be shown. All that’s required now is a simple WordPress loop and you’re all set!