Craig Freedman has a couple of great posts covering how recursive CTEs work:
http://blogs.msdn.com/b/craigfr/archive/2007/10/25/recursive-ctes.aspx
http://blogs.msdn.com/b/craigfr/archive/2007/11/07/recursive-ctes-continued.aspx
Paul White
SQLPerformance.com
SQLkiwi blog
@SQL_Kiwi