I like the new behavior in Windows 7 explorer much more. I used to use folder tree in XP and 2000 sometimes when I needed to look through the folder hierarchy. In other cases I kept folder pane off.
Then I liked the favorite places introduced in Vista which let me quickly go to a location I use often. But the folder tree was nearly always hidden because breadcrumb in the address bar allows me to change to a sibling folder easily.
So I think it's an improvement.
But I have to agree with the dotted lines connecting tree nodes it was easier to find the parent folder rather by the indentation alone.