Network Address Translation allows internet traffic into your network only if it was requested by a computer on your network. This is very useful, it keeps the various viruses, worms, hackers, etc. out of your system. Unfortunately, this is a problem when trying to connect to XBL games (or any peer-to-peer application like VOIP or file sharing.) NAT can be disabled in most routers but this is not preferable because it no longer provides any protection.
In the Xbox and 360 you can test your NAT settings. For gaming on XBL you want open. If it indicates moderate or strict, then you will have trouble connecting to game sessions.
To allow connection to XBL, there are a couple of options, Port Forwarding and the DMZ. The DMZ (DeMilitarized Zone) places your entire XBOX outside of the protection of the NAT router but allows the rest of your network to remain protected. This is relatively safe as most Xbox’s are only on when in use and there are currently not Xbox specific exploits on the web. Most routers have an option to designate one IP address as the DMZ. In the network connection setup of the Xbox, assign a Static IP address and then in the router’s setup, assign that IP as the DMZ. Router manufacturers vary but most router setup’s are accessed through your web browser by typing the default gateway IP address. [ RUN > cmd > ipconfig ] will show your gateway address.
The best and safest option is Port Forwarding. This exposes only the ports necessary to be exposed to the internet. For Xbox Live These are TCP and UDP ports 88 and 3074.
Again routers may vary but for Linksys WRT54G (by default) type into browser 192.168.1.1 then in login window, username {BLANK} password is admin. Then in applications and gaming select Port Range Forwarding. On the first line enter Xbox Live, enter 88 into the start AND end boxes, select both for protocols, enter the static IP that you assigned to your xbox, then click the enable box. On the next line, repeat using 3074 as start and end. Then click save settings and your NAT test should show open.
Just for fun, my new DSL modem also provides NAT and also needed to be port-forwarded. This is the first modem that I have seen that provided this feature, so check with your Internet Service Provider if in doubt.
Good luck and good gaming.
