It's certainly possible to develop on a Windows machine, in fact, my first application was exclusively developed on the old Dell Precision I had at the time :)

There are three routes;

1. Install OSx86 (aka iATKOS / Kalyway) on a second partition/disk and dual boot.
2. Run Mac OS X Server under VMWare (Mac OS X 10.7 (Lion) onwards, read the update below).
3. Use Delphi XE4 and the macincloud service. This is a commercial toolset, but the component and lib support is growing.

The first route requires modifying (or using a pre-modified) image of Leopard that can be installed on a regular PC. This is not as hard as you would think, although your success/effort ratio will depend upon how closely the hardware in your PC matches that in Mac hardware - e.g. if you're running a Core 2 Duo on an Intel Motherboard, with an NVidia graphics card you are laughing. If you're running an AMD machine or something without SSE3 it gets a little more involved.

If you purchase (or already own) a version of Leopard then this is a gray area since the Leopard EULA states you may only run it on an "Apple Labeled" machine. As many point out if you stick an Apple sticker on your PC you're probably covered.

The second option is more costly. The EULA for the workstation version of Leopard prevents it from being run under emulation and as a result, there's no support in VMWare for this. Leopard server, however, CAN be run under emulation and can be used for desktop purposes. Leopard server and VMWare are expensive, however.

If you're interested in option 1) I would suggest starting at Insanelymac and reading the OSx86 sections.

I do think you should consider whether the time you will invest is going to be worth the money you will save though. It was for me because I enjoy tinkering with this type of stuff and I started during the early iPhone betas, months before their App Store became available.

Alternatively, you could pick up a low-spec Mac Mini from eBay. You don't need much horsepower to run the SDK and you can always sell it on later if you decide to stop development or buy a better Mac.

Update: You cannot create a Mac OS X Client virtual machine for OS X 10.6 and earlier. Apple does not allow these Client OSes to be virtualized. With Mac OS X 10.7 (Lion) onwards, Apple has changed its licensing agreement in regards to virtualization. Source: VMWare KnowledgeBase

Official Developer Program

For a standard iPhone you'll need to pay the US$99/yr to be a member of the developer program. You can then use the adhoc system to install your application onto up to 100 devices. The developer program has the details but it involves adding UUIDs for each of the devices to your application package. UUIDs can be easiest retrieved using Ad Hoc Helper available from the App Store. For further details on this method, see Craig Hockenberry's Beta testing on iPhone 2.0 article

Jailbroken iPhone

For jailbroken iPhones, you can use the following method which I have personally tested using the AccelerometerGraph sample app on iPhone OS 3.0.

Create Self-Signed Certificate

First you'll need to create a self signed certificate and patch your iPhone SDK to allow the use of this certificate:

1. Launch Keychain Access.app. With no items selected, from the Keychain menu select Certificate Assistant, then Create a Certificate.

   Name: iPhone Developer
   Certificate Type: Code Signing
   Let me override defaults: Yes

2. Click Continue

   Validity: 3650 days

3. Click Continue

4. Blank out the Email address field.

5. Click Continue until complete.

   You should see "This root certificate is not trusted". This is expected.

6. Set the iPhone SDK to allow the self-signed certificate to be used:

   sudo /usr/bin/sed -i .bak 's/XCiPhoneOSCodeSignContext/XCCodeSignContext/' /Developer/Platforms/iPhoneOS.platform/Info.plist

   If you have Xcode open, restart it for this change to take effect.

Manual Deployment over WiFi

The following steps require openssh, and uikittools to be installed first. Replace jasoniphone.local with the hostname of the target device. Be sure to set your own password on both the mobile and root users after installing SSH.

To manually compile and install your application on the phone as a system app (bypassing Apple's installation system):

1. Project, Set Active SDK, Device and Set Active Build Configuration, Release.

2. Compile your project normally (using Build, not Build & Go).

3. In the build/Release-iphoneos directory you will have an app bundle. Use your preferred method to transfer this to /Applications on the device.

   scp -r AccelerometerGraph.app root@jasoniphone:/Applications/

4. Let SpringBoard know the new application has been installed:

   ssh mobile@jasoniphone.local uicache

   This only has to be done when you add or remove applications. Updated applications just need to be relaunched.

To make life easier for yourself during development, you can setup SSH key authentication and add these extra steps as a custom build step in your project.

Note that if you wish to remove the application later you cannot do so via the standard SpringBoard interface and you'll need to use SSH and update the SpringBoard:

ssh root@jasoniphone.local rm -r /Applications/AccelerometerGraph.app &&
ssh mobile@jasoniphone.local uicache