Rubbish, I'm using internet sharing and can quite happily connect with XP while using WEP with 128 bit key.
The secret is that OSX internet sharing only uses "shared key" authentication while the rest of the world does not tend to use it, they use "open system" authentication instead. That's why XP has difficulty and PSP's and PS3's can't connect at all unless WEP is switched off.
This didn't use to be the case, but somewhere between 10.4.0 and 10.4.9 Apple switched from open or from using both to just using shared key. I was miffed because I had to change the settings on a couple of laptops and it took me days to figure it out, and the PSP stopped connecting all together, and now my new PS3 has the same problem.
All may not be lost though check your wireless card properties on your XP box, if you're lucky you may be able to change the authentication it uses to shared key. It's usually on the advanced tab.
One other tip, you'll probably need to use the hex key rather than a pass phrase. The pass phrase conversion algorithm is only loosely standardised and frequently does not work between different makes of wireless cards. The hex key is the real password.
I use the WEP key maker from
http://www.chally.net/ to generate a key from a phrase.
Remember to stick a $ in front of the hex key way typing it (or pasting it) into the Airport settings.
20 inch Intel iMac Mac OS X (10.4.9)