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.