This is a type of projection for mapping a portion of the surface of a sphere to a flat image. It is also called the "non-projection", or plate carre, since the horizontal coordinate is simply longitude, and the vertical coordinate is simply latitude, with no transformation or scaling applied. The equirectangular projection was used in map creation since it was invented around 100 A.D. by Marinus of Tyre. See Mathworld's page for more detailed information on the mathematics of this projection.
In an equirectangular panoramic image all verticals remain vertical, and the horizon becomes a straight line across the middle of the image. Coordinates in the image relate linearly to pan and tilt angles in the real world. The poles (Zenith, Nadir) are located at the top and bottom edge and are stretched to the entire width of the image. Areas near the poles get stretched horizontally and squashed vertically.
The Equirectangular projection is the default output format of a rotating (scanning) panorama camera equipped with a fisheye lens -- 180� fisheye giving a full sphere at 360� rotation.