Okay, I tried again to compile a newer version of the kernel and this fixed the problem. I'm now running 3.2.13.
I'm not sure if the mods will allow this but I've written up a short tutorial on compiling the new kernel.
Note: It is generally not a good idea to compile your own kernel for backtrack. I have not extensively tested this kernel to make sure everything else works, and any bugs you encounter while using your own kernel are your own responsibility, the backtrack team most likely will not assist you with any issues you run into.
Download, unpack and configure the new kernel source
Go to Load an Alternate Configuration File and choose .config
tar xjf linux-3.2.13.tar.bz2
ln -s linux-3.2.13 linux
cp /boot/config-`uname -r` ./.config
Go to Exit and choose Yes when it asks if you want to save
Compile the new kernel (this will most likely take several hours to complete)
Check to make sure your .deb files were created
fakeroot make-kpkg --initrd --append-to-version=-custom kernel_image kernel_headers
Install the new kernel
root@bt:/usr/src/linux# cd ..
root@bt:/usr/src# ls -l *.deb
-rw-r--r-- 1 root root 7246700 2012-03-24 17:05 linux-headers-3.2.13-custom_3.2.13-custom-10.00.Custom_i386.deb
-rw-r--r-- 1 root root 39093754 2012-03-24 17:00 linux-image-3.2.13-custom_3.2.13-custom-10.00.Custom_i386.deb
Create a new initrd image
dpkg -i linux-image-3.2.13-custom_3.2.13-custom-10.00.Custom_i386.deb
dpkg -i linux-headers-3.2.13-custom_3.2.13-custom-10.00.Custom_i386.deb
Update your grub menu
update-initramfs -c -k 3.2.13-custom
Verify that you're on the new kernel
And now you shouldn't have any trouble with WEP networks
root@bt:~# uname -r
Edit: After compiling and booting this new kernel I have noticed that when setting up a fake AP with airbase, it will broadcast on channel 255 and no devices are able to see the fake ap. If I restart and boot into the old kernel it works fine. This is a known bug in airbase but I'm not sure if there's a kernel that resolves both issues.