Two main problems: First, the "key" is too short and so repeats a ton of times on a moderately large file so you have lots of opportunity to figure out parts of the key one place and use that knowledge a ton of other places. Second, you are xoring ASCII characters so it isn't that hard to recognize patterns.

If I wanted to do something like this I would:

• Compress the clear text first.
• Add a random pre-amble of random length since the compressed clear text will start with a predictable signature (see other threads here on how to get enough randomness).
• Don't use the key directly. Use a MD5 hash of the key, for example.
• Use the compressed clear text to modify what you are xoring with as you go.

But I'm not a professional cryptographer and I strongly suspect that a professional cryptographer would be able to break such a scheme. You are really better off to go with a recognized encryption algorythm.

        - tye (but my friends call me "Tye")