A legal iPhone application can only be developed on Apple hardware. ie, Mac systems.
The applications are developed on Apple OS [OS 10.5 or later] using iPhone Sofware Development Kit.
One has to register as 'iPhone' app developer through enrolling iPhone Developer Program [Standard Program $99 and Enterprise Program $299 as on today] in order to get the iPhone/iPod Touch - SDK.
Successful applications can be sent to Apple for approval and there by getting into Apple Store before reaching out to the customers.
Few people hack these steps to develop iPhone app using windows, however that cannot get through via App Store and will never be legal.
Lot of rources to guide through step by step creation of iPhone app can be found at developer central at Apple site.
http://developer.apple.com/iphone
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