I have now solved my tethering problem - I didnt need to use terminal.
I downloaded the kext utility, unzipped it and put the .app file into my applications folder, then I dragged the kext file from my laptop (AppleUSBEthernetHost.kext version 2.3.0)
The utility replaced the one that itunes 10.7 must have installed or modified into a backup folder and installs the one from my laptop where I was still on itunes 10.6.3 and it has the same permissions as the other files in that folder system/library/extensions
I rebooted and plugged my iphone in via the usb charger/data cable and immediatly the system put up a window stating:
A new interface has been detected
the "iphone USB" network interface has not been set up. To set up this interface use network preferences"
I then clicked the blue button NETWORK PREFERENCES
This showed the iphone in NOT CONNECTED status so I clicked on ASSIST me and just keep going, you will notice the red dot beside the iphone changing to orange (no IP address) then it changes to green and all is well!!
Thanks a million to Hibernian56 and whoever made kext-utility!!
No thanks to apple for not testing their software properly and wasting my time with hours of reading online!!!
Im on 10.6.8 on both machines
The problem with the kext file that was updated by itunes 10.7 was that the machine no longer detected the iphone thru the usb cable. Thanks to the other users on here its now fixed! ;-)