I'm having the same problem
I have the same issue with my Thinkpad T60p running Gentoo and kernel 2.6.20. I can connect fine to an unsecured network using iwconfig or wpa_supplicant but as soon as I try and use WEP nothing works. wpa_supplicant tells me that it is able to connect to the network but does not get an IP or anything. Using the iwconfig module, I get the "set encode" error mentioned above. Using wpa_supplicant I have tried:
- removing the iwconfig settings in /etc/conf.d/net
- modprobing the ieee80211_crypt_wep module
- in /etc/conf.d/net, setting: wpa_supplicant_eth0="-Dwext -c /etc/wpa_supplicant/wpa_supplicant.conf"
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