Here's the current status message:
Users may experience difficulties connecting or logging into to Xbox LIVE. We are aware of the problem and working to resolve the issue. We apologize for any inconvenience this may cause and thank you for your patience.
For my part, I got dropped a few times on Friday night, but was able to immediately reconnect. Getting things like friends lists and messages has been slow-going, and NXE stuff like connecting to parties has been a bit spotty. But the only in-game manifestation I saw was that I got dropped from some Mortal Kombat vs. DC Universe matches, which gave me four more losses than I should have. Suck!
Major "Larry Hryb" Nelson is posting a bit of a blow-by-blow account of the network's status that's a bit more informative than the boilerplate message on the official site.