What is a provisioning profile used for when developing iPhone applications?

A Quote from : iPhone Developer Program (~8MB PDF)

A provisioning profile is a collection of digital entities that uniquely ties developers and devices to an authorized iPhone Development Team and enables a device to be used for testing. A Development Provisioning Profile must be installed on each device on which you wish to run your application code. Each Development Provisioning Profile will contain a set of iPhone Development Certificates, Unique Device Identifiers and an App ID. Devices specified within the provisioning profile can be used for testing only by those individuals whose iPhone Development Certificates are included in the profile. A single device can contain multiple provisioning profiles.

You need it to install development iPhone applications on development devices.

Here's how to create one, and the reference for this answer:
http://www.wikihow.com/Create-a-Provisioning-Profile-for-iPhone

Another link: http://iphone.timefold.com/provisioning.html