There are no perfect tethering options for iPhone. All come with some sort of drawback. That said, among your limited options we feel the best is PDANet for its simple configuration, versatility and its ability to hide the fact that you're tethering from your carrier.
Australian editor note: Local carriers have generally avoided charging extra for using tethering features on phones, so most of you should be able to use the built-in functions. However, we've kept these posts as part of App Directory just in case that changes in the future.
- Tether over Wi-Fi using two different methods, essentially turning your iPhone into a Wi-Fi hostpot
- Tether over USB
- Can hide the fact that you're tethering from your carrier so you don't get in trouble
- Free to use for 14 days, but after 14 days you won't be able to access secure websites (sites that require a login) without purchasing a licence
PDANet is very simple and easy to use. You just turn on the type of tethering you want, connect on your computer, and you're all set. You can add WEP encryption to your Wi-Fi connection if you want some added security. Most importantly, you can hide your tethering activity from your carrier. This is huge if you're trying to get out of paying ridiculously high tethering fees (though these are more of an issue in the US than Australia).
PDANet has a few downsides, but you might not care about any of them. First of all, you need to jailbreak your iPhone in order to download PDANet. Not all users are going to want to jailbreak, but until Apple decides to approve tethering apps (which will likely never happen) your only other option is paying your carrier.
What is probably the biggest downside to PDANet is that it requires a desktop client. This is annoying, when it's main competition (MyWi) does not. PDANet also has a high price tage. Currently it is being sold for $US16, but normally it will cost you $US29. MyWi, which you'll find in the competition section, is $US20 (so usually cheaper -- just not at the moment). It doesn't provide the potentially necessary option of hiding the fact that you're tethering from your carrier, but depending on how much you tether that shouldn't matter. Of course you can still use PDANet without paying if you don't visit any secure web sites, but that likely prohibits you from accessing most of what you'll want to access.
Finally, you can only encrypt your connection with WEP. As we've noted before, cracking a WEP password isn't too difficult. If you want WPA you're out of luck. It is only a temporary network, of course, so it's not like you're necessarily going to need the added protection if the network is only up for an hour or so.
MyWi ($US20) also requires a jailbreak, but costs a bit less and offers a little more customisability. It's a really great app for tethering, and if it weren't for PDANet's ability to hide tethering activity from your carrier it's what we'd be recommending instead. If you want to learn more, read this.
Lifehacker's App Directory is a new and growing directory of recommendations for the best applications and tools in a number of given categories.