802.11b/g defines two possible (and mutually exclusive) radio modes that stations can use to intercommunicate. Those modes are BSS and IBSS.
BSS stands for Basic Service Set. In this operating mode, one station (the BSS master, usually a piece of hardware called an access point) acts as a gateway between the wireless and a wired (likely Ethernet) backbone. Before gaining access to the wired network, wireless clients (also called BSS clients) must first establish communications with an access point within range. Once the AP has authenticated the wireless client, it allows packets to flow between the client and the attached wired network, either routing traffic at Layer 3, or acting as a true Layer 2 bridge. A related term, Extended Service Set (ESS), refers to a physical subnet that contains more than one access point (AP). In this sort of arrangement, the APs can communicate with each other to allow authenticated clients to "roam" between them, handing off IP information as the clients move about. Note that (as of this writing) there are no APs that allow roaming across networks separated by a router.
IBSS (Independent Basic Service Set) is frequently referred to as Ad-Hoc or Peer-to-Peer mode. In this mode, no hardware AP is required. Any network node that is within range of any other can communicate if both nodes agree on a few basic parameters. If one of those peers also has a wired connection to another network, it can provide access to that network.
Note that an 802.11b radio must be set to work in either BSS or IBSS mode, but cannot work in both simultaneously. Also, BSS Masters (that is, APs) cannot speak to each other over the air without using WDS or some other tricky mechanism.
Generally speaking, most 802.11b networks consist of one or more BSS Master devices (like a hardware access point, or a general-purpose computer running the Host AP driver [Hack #63]) and several BSS clients (laptops, handhelds, etc). Ad-Hoc networks, on the other hand, are handy for setting up a point-to-point connection between two fixed devices, or if a couple of laptops need to exchange files and there is no other wireless network present.
In the early days of 802.11b, many manufacturers implemented their own version of Ad-Hoc mode, sometimes referred to as Peer-to-Peer or Ad-Hoc Demo mode. Such devices could only communicate with each other and weren't compatible with true IBSS mode. Recent firmware updates have helped IBSS mode interoperability quite a bit, but not all cards can communicate with each other when speaking IBSS. Generally, any client device can talk to any access point regardless of the manufacturer, provided that both are certified to speak 802.11b/g.
Bluetooth, Mobile Phones, and GPS
Network Discovery and Monitoring
Wireless Network Design
Appendix A. Wireless Standards
Appendix B. Wireless Hardware Guide