I can't say I understand exactly what "Custom XML" is used for in Word 2007 and 2010. However, Microsoft lost the patent lawsuit over it to i4i.
ZDNet's Mary Jo Foley (back in August) seemed to be puzzled by it too. So, I'm not alone in trying to understand what the removal of this feature means.
Matt Asay commented 9also back in August) that it may affect working with the ODF format.
Here's Microsoft's MSDN overview of XML in Word in general with comments throughout about "custom XML".