I suspect the wireless strength is low and/or you have a signal conflict with a nearby router (my neighbors networks all interfere with any channel I pick).
We used to play online games back in college with a 3/3 Internet connection and it never lagged too bad.
I would suggest trying to run a temporary cable directly to the router and see if your gaming experience improves. If that is fine, try to move the router closer, or get an extender cable for the USB wireless dongle and place it somewhere that it seems to get a better signal.
I highly suggest a program called inSSIDer for analyzing network strength and interference. It will give you a "link score" that is continually updated as you move the router/your network adapter around.