Overflow line tied with Condensate Line
I'll try to break down what the inspector is describing.  Keep in mind that these inspection reports will show "defects" that are simply things that do not meet certain recommendations they look for.  They may not be up to code, etc.  The problem with some inspection reports is all defects are called out in the same way.  One defect can be seriously dangerous while another on is merely an annoyance.  Understanding why it is considered a defect is the most important thing.

You basically have two issues.  The first is that the A/C condensate drain is tied into the temperature and pressure relief overflow for the water heater.  Imagine the pressure and temperature in the heater rises to a dangerous level and the valve activates.  That's going to force scalding hot water to flood your air conditioner because they are both connected.  The A/C housing will leak and the PVC pipe will not stand up to the temperature or pressure for long.  This is not the way it should be done.  The A/C condensate drain should flow into a nearby drain pipe.  It's common for it to tie into a bathroom sink drain or similar.

The second issue is a little less clear, but we can assume it's related to the first.  The inspector is saying that there is not a proper overflow drain to the outside for the water heater.  This could be because the overflow doesn't run all the way outside, but since the condensate drains there it probably does drain outside or into the sewer.  He probably means the overflow drain isn't functional because of how its tied into the A/C.  

So, if you have a gas water heater, and you don't have access to a proper drain, you can get a special gas valve like the Watts 210-5.  This is a temperature sensitive valve that will cut off the gas supply to the water heater if it gets too hot.  The idea is that cutting off the gas stops the dangerous heating of water without it getting to the point of blowing water out of the TPR valve that doesn't have a proper drain.

The Watts valve seems to be pretty expensive - online prices range from $250 to $400.  On top of that you will need some additional gas piping, and if someone else is installing it, you could be in the $800 neighborhood pretty quickly.  Also if the water heater is old then any time you mess around with the pipe fittings going into the tank, you have a chance of doing irreparable damage if they are corroded (have to replace the water heater).

If the copper overflow pipe does go outside, then rerouting the PVC A/C condensate drain could be cheaper.