A 169.xxx.xxx.xxx IP address is assigned by Windows if there is no connection to a router with a DHCP service running. You won't be able to access the Internet with this IP
When connected to the router via Ethernet you should reboot the PC. Your router DHCP will assign a private local IP to your computer. This is usually in the 192.168.xxx.xxx range.
If this is not happening then your devices are not getting a IP from the router.
You can't just plug into the laptop, You'll need to setup Internet Connection Sharing (ICS). Depending on your devices, you may also need a special Ethernet crossover cable. Here are detailed instructions to get ICS setup. http://windows.microsoft.com/en-us/windows-vista/using-ics-internet-connection-sharing
A better idea would be to add a USB wireless adapter to the desktop. They are relatively inexpensive. ($10) - http://www.amazon.com/gp/product/B003MTTJOY/ref=as_li_ss_tl?ie=UTF8&camp=1789&creative=390957&creativeASIN=B003MTTJOY&linkCode=as2&tag=excharge-20
That being said,
Wireless signals are affected by many factors including distance, wall density, electrical interference, directional antenna range, etc.
All of these factors will affect your actual wireless range. As wireless connection quality varies the connection speeds are renegotiated. The WiFi connection between your device and the wireless router may start at 300 Mbps and end up at less than 10 Mbps or drop entirely.
For serious gaming or video streaming your best bet is a direct Ethernet connection. Ethernet is unaffected by wireless interference and will give you a rock solid, stable network connection.
If it is not feasible to run Ethernet cable the next best option would be a set of powerline network adapters http://isp1.us/reviews/netgear-xavb2101-powerline-adapter/
You plug one in by your router and one in the room where you need access and connect them to the devices with standard Ethernet patch cables. The network signals are transmitted over your existing home electrical wiring which will not be affected by wireless interference. There is still overhead in the connection but it is much more stable than WiFi.
Good Luck...