@Dutchess
I can’t provide all the techy details but I can give you a brief answer to your Q of “How?”
I can only speak for what I’ve researched about iPhone 3G so it may be different for other phones.
You would need to download an App specifically designed to facilitate the tethering process. AFIK the official iTunes Appstore has not authorized any tethering apps.
Therefore you would need to use Cydia or something similar to access unofficial apps which would facilitate tethering.
In order to use Cydia, you need to Jailbreak your iPhone. Contrary to what some people have stated, jailbreaking is NOT ILLEGAL.
It’s merely unapproved by Apple and will void your iPhone warranty if they can prove it. But that is a far cry from illegal. Just because Apple frowns upon it doesn’t mean anything, legally speaking. There have been court cases where Apple has tried to get them to declare it illegal but they have been unsuccessful.
Your phone is your property and you can do what you want with your own property.
My iPhone is past two years and no longer has a warranty to void so I’ve been seriously looking into jailbreaking.
Anyhow, the basic how-to for tethering breaks down to:
1) jailbreak phone
2) search for a tethering app and download it.
3) follow the app’s directions for how to set up the tether.
What you’ll basically be doing is turning your phone into a wireless modem/router enabling you to connect your computer to the Internet. Your phone is basically taking the place of a router/modem to carry the wireless signal.
If you think about it, even if you go to Starbucks or similar which offers free Wifi, if they did not have a router broadcasting the signal, your computer couldn’t access it. So that’s what your phone will be doing via the tethering app.
Does that cover it for you on the how part?
Instructions for jailbreaking are all over the Internet and it’s a pretty simple procedure.