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If this is the first time you have connected your Xbox 360 to Xbox Live, you will probably be prompted to apply an update. If there are no updates, the Xbox Live Connection page shows that you're connected to Xbox Live. Press the Y button on your controller to continue.
If testing the Xbox it says DNS failed, then update your NETGEAR router firmware:
From your computer, open an Internet Browser and navigate to http://kb.netgear.com to download the firmware for your router.
Log in to your NETGEAR router by browsing to http://www.routerlogin.net or http://www.routerlogin.com. Enter the username (admin) and password. By default, the password is password or 1234 unless it has already been changed.
Click Router Upgrade on the top left pane under Maintenance, browse for the firmware downloaded and click Upload.
XBOX 360 will only work properly with a 'genuine' USB WIFI adapter designed specifically for it (and at an over inflated price IMO!). One popular way to play 'network' via the internet is to connect the XBOX 360 to your PC via Ethernet cable and have the PC connecting to the internet either via another ethernet connection or more likely via a Wifi connection which could be via your USB adapter connected to your PC and talking to your Wifi Router)
I assume the wireless router is configured correctly and the PC can connect to the wireless router and the Internet.
The problem could be that the signal is too weak upstairs for the XBox especially if you have a concrete floor between the XBox and the wireless router. Try moving the wireless router around to increase signal strength to the CBox.
The other problem could be the XBox is not configured correctly.
Follow these instructions to configure the XBox.
In the Xbox Dashboard, go to My Xbox and open System Settings.
Select Network Settings, Configure Network.
On the Basic Settings tab, select your wireless settings.
Select the name (SSID) of your wireless network. If your router isn't broadcasting your network's name, select Specify Unlisted Network and enter the name.
If your network has wireless security, enter your WEP or WPA key.
make sure its pluged in properly then scan for networks if it does not find any networks make sure that your ip address is set to auto then tipe in your WPA key that sould work if it doesnt send me an email to email@example.com and i will walk you trough the steps till you can conect and PLZ RATE SOLUTION TANKS
If Internet sharing is set up correctly one pc will be the one that connects directly to internet, the other will connect through a gateway or other device connected to your network.
Check they have'nt both got the same IP address.
Is this related to last problem, did you get the wireless card working wirelessly online?