I had experienced the same issue with both Feisty Fawn and Sabayon Linux
on my thinkpad t30.

It has an intersil prism2.5 pci card, using the hostap driver.

It appears that NetworkManager misinterprets or otherwise fails to scan
for networks properly.  However, I did discover a workaround:

1: stop NetworkManager
2: start wpa_supplicant with control interface
3: initiate a scan with wpa_cli
4: kill wpa_supplicant
5: start NetworkManager

After doing this, I find that the list of networks now show WPA flags on
the details that pop up, and when selecting one, it now prompts for the
appropriate wpa password instead of having wep as the only option.

I am not sure if this fixes NetworkManager with successive scans, I get
the sense that it will not.  Until a real fix is created, I'm simply
adding the steps above in the NetworkManager init scripts for now.

-- 
WEP is listed on WPA configure AP.
https://bugs.launchpad.net/bugs/59549
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