You pay the $99 to Apple, then you can associate XCode with a local phone and develop/test your app. You can also get the UDID number from another person's phone, and distribute the app to them to beta test. I believe there is a limit of 25 beta testers + the developer's phone.
You can also use testflightapp.com which has its own SDK and will notify people on updates and has a pretty good customer experience manager built in, allowing you to get feedback from within the app. Apps can be deployed through them for beta or production and you can collect a number of metrics. I've not actually worked with it yet - I'm at roughly the same stage you are and am buying an IPhone today to test my app.
Note that you need not just to generate those certificates and download them. You need to also manually open the keychain access and import those files in there. Only then will the Provisioning Profile in the Organizer show up.
You can also use testflightapp.com which has its own SDK and will notify people on updates and has a pretty good customer experience manager built in, allowing you to get feedback from within the app. Apps can be deployed through them for beta or production and you can collect a number of metrics. I've not actually worked with it yet - I'm at roughly the same stage you are and am buying an IPhone today to test my app.