I'm planning to do the same thing with my Droid/iPad combo, but unfortunately I let my Droid update to Android OS 2.1 last week. Apparently ver 2.1 has not been rooted yet, and I'm not interested in doing the risky thing of going back to 2.0.1 then rooting then going to 2.1.
I've got Barnacle downloaded and waiting on my Droid. It works like the other tethering app but doesn't require a special ROM.
Tethering is being able to use your cell phone as an access point (either wired or wireless) to access the internet over the cellular service. The setup involves rooting the phone so the tethering app has a higher level of access to the phone components. Once the application has that access it can listen tell your phone to listen to it's WiFi connection for any devices. When your iPad searches for a wireless network it will see your phone as an access point just like the access point you probably have at home. Once the iPad connects to your phone, you are "tethered" and any internet access you iPad tries to make will go to the phone via WiFi and then out over the phone's 3G connection.