The definition of insanity is trying the same thing over and over again expecting a different result.
Skip to the last two lines if techie stuff bores or confuses you.
I am experiencing the same/similar problem with the 10-11-11 update. Spent four hours on the phone with xbl support, spoke with five different support reps from three different departments at various levels levels of expertise. Eventually my ticket was escalated to a top tier engineer. We tried EVERYTHING... Restored profile and attempted to do a manual update with three different USB storage devices, reconfigured my router several times (even though it was configured properly to begin with), switched from wired to wireless, downloaded update a second time, just in case the file was corrupted during the dl and copied the uncompressed files to a freshly formatted USB drive, power cycled the console and router several times, and tried a few other things that I will not say because (IMHO) it was bad advice from one of the lower tier xbl support reps.
Here is the straight dope.
The update going around right now ( the 10-11-11 update) is not for all consoles, it is only for those that missed the spring (5-19-11) system update. It is meant to get all consoles that do not have the spring update installed prepared for the upcoming fall update. The way xbl customer support put it... It's analogous to a (win xp) service pack, it's purpose is to update core Xbox operating system files related to system security and stability, it does not change the dashboard.
Most updates are installing without any issues, however, a few people (such as myself) are having a problem downloading and installing the update directly from the console. Additionally, for those affected by this issue, a manual install cannot be accomplished by downloading the update from the xbl website to a PC, transferring the files to a USB thumb drive or disk, The console will not boot from the USB device or a burned disk because of a compatibility issue within the update itself. If you try to directly download the update from your con and install the update and you get an error code like this one 351F-0000-0080-0300-8007-2F76, or a similar code, the problem is not with your xbox. The problem is a software/firmware compatibility issue at the xbl end of things. It's not you.
I have been told that a team of highly skilled giraffes at xbl are working on a solution that should be in place by (or possibly before) Friday or Saturday. If you attempt a direct console or manual update using a USB thumb drive and it fails, DO NOT let a low level support rep talk you into sending your con in for service. This is not a broken hardware issue, it is a server side software/firmware update issue that is popping up on a limited number of consoles. If a support rep tells you to send in your console, insist on an escalation to a higher tier support rep or a supervisor before determining that your system needs to be sent off to the xbox hospital.
Simply put, the update has a compatibility issue affecting some consoles in a way that stalls (prevents) the update from being downloaded and properly installed. Consequently, as a result of the mandatory update not installing, the console will not be able to connect to xbl.
Basically, we need to be patient and wait for the xbl system software team to fix this update compatibility issue on their end.