That IP address is usually self-assigned by the OS when it us unable to contact a DHCP server. If you use the Airport utility in OS 9, and scan for networks, is your listed? I hate to sound like a Tier 1 Tech Phone Drone, but did you type in the password correctly? You should be able to use encryption with it, but stay limited to WEP.
For troubleshooting purposes, I would disable ALL security on a temporary basis and see if I could connect. If so I would work my way up from there, turning on the weakest encryption. If I cannot connect then I would go for MAC Address filtering. If that works then I would disable SSID broadcast and test again. If that works you should be reasonably secure.