Upon installation, notify administrator that taxonomy terms must be added before creating ads.

This is not a bug, it is by design. You must create ad category terms in the automatically-created taxonomy "Classified Ads" before you can allow anyone to create any ads. I will admit that the user interface needs some polish in order to avoid this confusion.

Per the README.txt instructions:

IMPORTANT: Add terms to the taxonomy that has been created during the installation.
The taxonomy name is called 'Classified Ads' by default, and you should add some terms before
you allow any classified ads to be created.

For example, you might want to create a simple taxonomy structure like:

- Buy
- Sell
- Trade

etc. Be sure to set desired options for the taxonomy - like single/multiple select,
hierarchy options, etc. The taxonomy should have been configured to work with the
ed_classified content type. I've used various taxonomy schemes, and I will be providing
handbook entries that describe how to use taxonomies to manage classified ads.

Note: do not delete this taxonomy vocabulary - it's 'owned' by the ed_classified module, and is
required for proper functioning.

The installer does not create any category terms under "Classified Ads" taxonomy, since I can't possibly know what you need in your classified ads. I will change this to a task to add some kind of notice upon installing the module.

Version 6.3 adds two terms by default, and the README.txt file explains one should customize terms before configuring the module.