What References Do

PHP references allow you to make two variables to refer to the same content. Meaning, when you do:

 <?php
$a =& $b 
?>

it means that $a and $b point to the same variable.

Note: $a and $b are completely equal here, that's not $a is pointing to $b or vice versa, that's $a and $b pointing to the same place.

The same syntax can be used with functions, that return references, and with new operator (in PHP 4.0.4 and later):

 <?php
$bar =& new fooclass();
$foo =& find_var ($bar);
?>

Note: Not using the & operator causes a copy of the object to be made. If you use $this in the class it will operate on the current instance of the class. The assignment without & will copy the instance (i.e. the object) and $this will operate on the copy, which is not always what is desired. Usually you want to have a single instance to work with, due to performance and memory consumption issues.
While you can use the @ operator to mute any errors in the constructor when using it as @new, this does not work when using the &new statement. This is a limitation of the Zend Engine and will therefore result in a parser error.

The second thing references do is to pass variables by-reference. This is done by making a local variable in a function and a variable in the calling scope reference to the same content. Example:

 <?php
function foo (&$var)
{
    $var++;
}

$a=5;
foo ($a);
?>

will make $a to be 6. This happens because in the function foo the variable $var refers to the same content as $a. See also more detailed explanations about passing by reference.

The third thing reference can do is return by reference.