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Is there an option in Windows 7 (or 3rd party) to offer Tethering (that is, act as a WiFi hotspot while being connected to a WiFi network?)

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Take a look at Connectify: http://connectify.me

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Create an ad-hoc network. Here is the guide for Windows 7 from the Microsoft site. http://windows.microsoft.com/en-US/windows-vista/Set-up-a-computer-to-computer-ad-hoc-network

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You could use the ad-supported Connectify app, as someone else mentioned, or use http://virtualrouter.codeplex.com/, or do it my hand with the netsh command and ICS with a little bit of effort:

netsh wlan set hostednetwork mode=allow ssid=YOURFRIENDLYSSID key=SOMEPASSWORD

netsh wlan start hostednetwork

... then share the real connection through the virtual WiFi NIC.

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FWIW, I equate "ad-supported" with adware, whereas, unless it's changed since last I used it (unfortunately it causes my laptop to bluescreen when putting it to sleep - Broadcom, surprise surprise), it's "ad-supported" in the same sense that Adobe Reader and Java are, in that the installer asks you if you want to install the unwanted e.g. Google Toolbar with it. – Mark Sowul Feb 28 '11 at 22:01
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