Through much trial and error it became clear that as strange as it sounds, the iMac must create the ad hoc, even though the iMac is not the computer sharings its internet connection!
This problem does not occur with the new OS X 10.5 Leopard. In Leopard, the computer sharing the internet connection can set-up an ad hoc network and the computer running Leopard can connect to that network without problems.
Creating an ad hoc (computer-to-computer) network
W i n d o w s V i s t a a n d O S X T i g e r ( o n G 5 )
This network was created between a Sony VAIO notebook (running Vista) and an Apple iMac G5 (running Tiger) for the purpose of sharing an internet connection hosted by the Sony VAIO with a PC Express card connecting to a Vodacom (ZA) network with HSDPA.
For some reason, it seems as if a functional ad hoc network can only be created if the Apple computer is hosting the network, even though it is not the device sharing the internet connection.
On the iMac: on the top right select the Airport sign and select Create network...
Choose a suitable name and provide some form of security – in this case WEP is used.
Once OK is clicked, the network is active.
Now the Windows machine must connect this network using the password as set.
As the Windows machine is sharing the internet connection, it will serve as router meaning that it will have the IP address of 192.168.0.1. It will lease an IP address to the Apple machine as is shown below. In this example, the Apple's IP address is 192.168.0.221. To see this information, go to: System Preferences and click on the Network icon. Select the TCP/IP tab.
If the connection is fully functional then the dot next to "Airport" will be green. If it is yellow, internet sharing is not functional and only file sharing may be working correctly. If the dot next to Airport is yellow, return to the TCP/IP tab in Network under System Preferences. If it shows a strange IP address, then the internet sharing is NOT working.
