One thing that I found with my XBOX Wireless adapter was that it would only connect to my wireless network when the wireless network's WEP default transmit key is set to #1. I had tried a ton of different configurations, and even though the XBOX Live dashboard indicated that the XBOX had detected and connected to my wireless network, I still couldn't connect to the XBOX Live server.
My wireless network had been set to Default Transmit Key #2, and all devices on the network connected to the network using Key #2's 128-bit 26 hex encryption code. However, my XBOX would not connect using the Key #2 encryption code. But as soon as I changed my wireless network to Default Transmit Key #1 and entered the Key #1 encryption code into the XBOX settings, it connected to the XBOX Live server without any problems.
So if you're not using Key #1 for your wireless network encryption, try changing it. That should hopefully resolve the problem.
P.S. - I just set my DNS settings to AUTO and it worked fine.