Microsoft will be providing owners of the Xbox 360 Wireless Racing Wheel with a retrofit to prevent an issue that "a very small number" of people have experienced. Namely, the device overheated while the power supply was connected, which was followed by the release of that lovely blue smoke with the fried electronics smell.
If you currently own one of these devices, Microsoft recommends that you discontinue use of the power supply until the retrofit is in place, and use only battery power. To get your free retrofit, you can go to http://www.xbox.com/support or call Xbox support at (800) 4MY-XBOX (469-9269).