Windows wireless encryption settings need clarification

In Windows Vista, if I properties

click on my wireless connection and go to the security tab, I am allowed to install authentication type

and encryption type

.

I'm confused! So any client computer that connects to the router wirelessly can set these two things?

So computer A can set the encryption type to WPA and computer B can set it to WEP?

Then, when an outsider tries to connect to that router, what type of encryption will THEY see?