Basically NAND is the phones internal memory. Generally, the internal memory is locked to prevent users and applications from modifying core system files unless the client has root privi's. This is why currently, even though you have root, you cannot fire up a console within the phone, write something to /system and retain that information. Currently, you will either get an 'access denied' error, or, the system will reboot itself when the changes commit.
Custom recovery refers to a recovery mode that gives all access to the system files. Right now, booting into recovery leaves you with nothing but allowing you to push a special "update.zip" , factory reset, or reboot. The only way we actually have the ability to do soemthing is through the exploits that we have been trying to use to get root access. With a custom recovery, we wont need to worry about hacking through exploits as the recovery will be open and customized for the device (so we can update the os, make backups, write stuff to /system/ etc)