Right!
The PocketPC 2003 and Smartphone 2003 images that ship with VS2005 have the NAND flash driver in ROM. If you launch with "/flash <filename>" on the command line (or the equivalent from the config dialog), the emulator will populate the 64mb of simulated NAND flash with a formatted filesystem that persists from launch to launch of the emulator.
Unfortunately, the NAND flash driver isn't present in Windows Mobile 5.0 images for the emulator, but it makes its return in Windows Embedded CE 6.0.
In the Shared Source release, open boards\smdk2410\devices.cpp and search for "IONANDFlashController" to see the implementation.
Barry