We've heard rumors and gotten questions about whether the iPad 2 gains any GPS functionality when tethered to an iPhone 4 and, based on our tests (see the video above) -- yes it does, albeit a little dumbed-down. GPS functionality seemed to be working in both Maps and Navigon, but it clearly doesn't work half as well as the 3G enabled iPad with assisted GPS built-in. Still, if you've decided on purchasing the 3G enabled iPad 2 primarily for its GPS capability, you may want to consider tethering an iPad Wi-Fi to iPhone 4 as an option.
Keep in mind the test was conducted on an iPhone 4 running iOS 4.2.1 using MyWi to create a wireless hotspot, however the results should be the same when using an AT&T or Verizon iPhone 4 (running iOS 4.3 or 4.2.6 respectively) with the Personal Hotspot feature baked-in. Results should be similar on the original non-3G iPad as well, and make sure you have location services enabled on both devices for it to work properly.
So although this technically works, we wouldn't suggest using it as a full in-dash GPS unit by any means. If you want to do things like location-aware tweets it should work like a charm by roughly pinpointing your location when Wi-Fi router mapping isn't an option.
If you have a Wi-Fi-only iPad then pair it up with your iPhone 4 and let us know how it's working for you in the comments below!