There are two different things being configured: The Macintosh and the Wireless Access Point ("airport base station" in Apple parlance). (If you are running more than one Mac/PC on the wireless network, every Mac and every PC needs to be configured, but the WAP/ABS only needs to be set up once.)
Whether WEP is being used (and its key size) is established by the wireless access point, using whatever utility configures the product you are using. (In the case of a LinkSys that's via a web browser; if you are using Apple's Airport Base Station it is the Airport Admin Utility.)
When your Mac attempts to connect to the wireless access point, it determines if encryption is being used based on whether the access point demands it. If the Mac detects WEP being used, it uses the password you entered in the Airport tab of the Network system preference application; if you didn't fill one in in Network preferences, Internet Connect pops up a dialog asking for the password to join the wireless network (with a check-box offering to remember it for you on the Keychain, as I recall.)
With the Linksys WAP, you configure the Linksysy and turn on WEP using your Mac's browser to access the WAP (enter address blank>http://168.192.1.251 or blank>http://192.168.1.1 in the browser URL field, whichever your LinkSys model uses. See the manual that came with it for the address to use.) You enter the LinkSys's admin password (which is "admin" when the LinkSys is first turned on - something you should be sure to change later), and you get a web page provided by the LinkSys itself which you use to configure it. The "Setup" tab on this page has a button by "WEP" to make it mandatory, and a WEP Key Settings button, at which point you need to generate a key.
The Linksys generates a key based on a passphrase. You enter some passphrase and click generate (whatever passprhase you like, though it shouldn't be easy to guess. I usually just let my fingers to some random tapping on the keyboard. I've never needed to remember it.). the LinkSys then displays a web page with the hexadecimal string that is the key it just generated. (Linksys actually generates several possible keys, and lets you pick one.) You copy the key you are going to use down someplace, like a Stickie.
Later, you will be prompted by the Mac to enter that key to let your Mac re-connect to the LinkSys. (Indeed, once you turn on WEP in the wireless access point every Mac or PC will need to have that key to use the wireless network.) When you enter a hexadecimal key into Internet Connect's popup password dialog, or into the System Preference's Network's Airport tab's "password" field, you precede the hexadecimal string with a dollar sign ($) so it knows it's a hexadecimal string. (if you were using Apple's airport Base Station, the key would consist of any characters, not just hexadecimal 0-9 & A-F). Since a hexadecimal string such as "FEED32" could be interpreted either way, you have to provide the dollar symbol ($) to let the Mac know which way to interpret what you typed. A check-box called "the key was entered in hexadecimal" might have been less confusing, but "$" is what Apple chose.
[ 08-30-2002: Message edited by: car1son ]