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Sticker,
What does 'the iPaq is connected' mean? Are you getting a valid IP number from your router without or with WEP enabled? If you get one without, but not with, and you are sure you are entering the key correctly (in hexidecimal format), look in your router settings to see if it has an option for short vs. long preamble, try changing it from the current setting (I think the default on some Linksys is for the setting to be 'short,' and 'long' apparently works better with some PPCs).
Are you using an open or shared key? I think with a shared key, most routers require MAC-filtering also be enabled, so make sure the MAC address from your wireless adapter on your iPaq is listed in the router settings.
Finally, it seems like a bad sign if you are getting the 'no modem' message with the settings I outlined above if you wireless is active. Someone correct me if I'm wrong, but that sounds like a hardware problem and it may be worth a call to HP.
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