I am assuming that you are using windows XP or Vista. I am assuming that your ethernet is already configured properly for accessing internet. We first need to make your PC/laptop capable of talking to the iphone and viceversa. Follow the below steps to setup an adhoc network between the PC and the iphone.
1. Go to control panel -> network connections.
2. Right click on "Wireless network connection" and choose properties
3. Choose "Wireless Networks" tab.
4. Click the "Add" button, in "Preferred networks" section.
5. Give "iphone-net" as SSID (you can choose any other name)
6. Select "Open" for "network authentication"
7. Select "Disabled" for "data encryption"
8. Tick the checkbox saying "This is a computer-to-computer(ad hoc) network..."
9. You need not change anything else in the other two tabs.
10. Save your settings, by pressing OK in all the places. If everything goes fine, in your iphone, you will be able to see "iphone-net" as one of the available wi-fi networks when you turn on the wi-fi in the iphone. Do not connect to it yet. The procedure ahead is very simple if you have DHCP available on your ethernet. i.e if you automatically get an IP when you connect the LAN cable. Most of the ADSL broadband modems have this functionality. They assign an IP to the PC, when the LAN cable is connected. If you are not a geek you mostly would use this feature to get an IP for your PC.
For now, let us assume that you have DHCP available on your ethernet, where you have internet connection. (If you do not have DHCP, you should follow some extra steps that I mentioned at the end of this tutorial). Follow the steps to create a network bridge.
1. You will have at-least have two entries in your network connections.
2. One will be of the ethernet, and another will be of the wireless network.
3. Select the two connections (by doing ctrl+left click).
4. While both the connections are selected, right click and select "bridge connections"
5. It will take a little while to bridge connections.
6. You will get one more entry in network connections with name "Network Bridge"
You are almost ready to go. Do your routine exercise whichever you follow to be able to access the internet on your PC. For e.g starting your ADSL modem, and/or connecting the LAN cable etc. Once you are able to access internet on your PC, do the following on your iphone.
1. Turn on the wifi
2. Select iphone-net that will be shown in the available networks.
3. Click the small blue round arrow on the right
4. It will give more details about the connection.
5. You should see the IP that is in the same range as that of your PC.
6. Open the safari browser, and open some website. It should work.
Enjoy!!
(I am bored now, I will write later on how to access internet if there is no DHCP on the ethernet. For the knowledgeable, its obvious that we need give static IP in both the PC and iphone in the same range. I will explain it later)
One big and irritating problem that I face is that, the network connection keeps dropping very frequently. It gets disconnected every 10 mins or so. The wifi signal indicator does not become grey, but internet access will cease. I do not know a permanent solution to this. If you know, please help me. The workaround is to turn-off the wifi and turn it on again.
See the following tutorial about network bridges for general idea. This network bridge is available only on windows XP and vista. This technique is very simple. I couldn't succeed to share the internet using the ICS(Internet connection sharing) feature. I did not try much. Also, I am not sure if we can create a bridge with a dail-up connection. I do not have first-hand experience but by quick googling it seems that it is possible.
