<<<Then when I double click on the wireless network icon it says it is connected at 54mbps (being an adhoc network it should be 11)>>>
While the 802.11g standard only REQUIRES an 11Mbps connection when used in "Ad Hoc" mode, your WiFi adapters COULD support a 54Mbps Ad Hoc connection.
The 169.254 IP address indicates that the adapter has been unable to get its address from a DHCP server and, although you can allocate a fixed IP address, that doesn't solve the fundamental problem that the adapter cannot access your "Internet Connection Sharing" HOST PC.
I have read in these forums that ICS over a wireless link in an "Ad Hoc" network only supports one "client" PC, but as I only have two wireless adapters and a router, I cannot check this for myself. Personally, I see no reason why this should be the case. Certainly a "wired" network with ICS and two clients works, because I've tested that.
Try shutting down YOUR laptop and see if the NEW laptop can then get an IP address by DHCP from the "host" PC.