Here's some better documentation from the Delphi 2007 help file:
Use the Prepared property to have the provider save a prepared (or compiled) version of the query specified in the CommandText property before a Command object's first execution. This may slow a command's first execution, but once the provider compiles a command, the provider will use the compiled version of the command for any subsequent executions, which will result in improved performance.
If the property is False, the provider will execute the Command object directly without creating a compiled version.
If the provider does not support command preparation, it may return an error when this property is set to True. If the provider does not return an error, it simply ignores the request to prepare the command and sets the Prepared property to False.
This basically says that the SQL statement is compiled (pre-parsed and tokenized and analyzed). When the query is used more than once, this compiled version can be used each time just substituting the parameter values, without having to re-compile all of the statement and do the other work.