As a filename extention typically used for driver installations, it means "Setup Information" (It's what Plug 'n' Play runs when it sees the file, plus you can manually run with a right-click)
A few applications use INF files to install instead of executable files (ie, TweakUI)
Many PnP devices recuire nothing more than an INF to install (PnP Monitors for instance, only need to report the VGA capabilities to the OS through an INF)
The Intel INF Update is significantly more than that though. It is necessary for correct motherboard hardware installation. My D850GB motherboard (i850 chipset, + ICH3) has no DMA checkbox in Win98 until I run the INF Update, and would crash in 3Dmark2001 without it. Contrary to popular belief, the default IDE drivers in Win98 are not universal for integrated chipsets. It also installs the correct USB support and System Management Bus, AGP and various motherboard chipset-specific hardware.
Intel's INF Update works much like nVidia's Detonator / Unified Driver Architecture initiative. It supports all modern Intel boards and all modern versions of Windows with one executable. With XP, many boards no longer require it for DMA support but it's still required for much else.