I had this problem hapen to me recently, and with the help of Apple and other forums, I solved the problem. Here's how I did it.
I have a PowerPC G5 with 10.4.5 on machine A, a PowerCenter 166 upgraded to a 500 MHz G3 with an Orange Micro Firewire/USB adapter with OS 9.2.2 (modified with OS9 Helper) on machine B, a Starview 2-Port USB KVM switch, and a D-Link DI-624 wireless router between the two machines.
My first issue was that I am clueless about networking. Through hours and hours trial and error, I learned that the control panel settings for file sharing in machine B need to identify that machine (and similarly for machine A). I thought that to access one machine from another required having the other machine's info in those fields. When I was able to connect to the other machine and it asked for the name and password, I entered the name and password of the machine I was trying to access.
My second issue involved the 169. IP situation. I trashed the Mac TCP DNR file and the prefs, but to no avail. I read elsewhere that this IP prefix was used with a private network, so I assumed that my network "was" a private network, so I didn't realize that was a problem (oh, blissful ignorance). I realized that the reason machine B was using a 169 IP was that it didn't recognize my other machine. I used the DI-624 tools to ping both machines. It successfully pinged machine A, but not B. So, it seemed that machine B was using a 169. IP because it could not connect with the router. The router tools said my connection was ok, but I bought a new cable anyway. The new cable solved the problem. Apparently, the router tools only verified there was a connection, not that it was connected properly.
I hope this info helps others.
Greg
PowerMac G5 Mac OS X (10.4.5)