OK: This is how you get it working.

Here is the proper invokcation of wpa_supplicant:

wpa_supplicant -D madwifi -c wpa_supplicant.conf -i ath0

After authentication with the network, then you need to grab an IP address using DHCP.
This is done by typing:

pump -i ath0

AND YOU ARE DONE! Finally after two weeks of strugglng, I have finally got it working.
Good luck to others who also have this problem.