Xbox 360 owners wanting to connect themselves to Xbox LIVE may or may not want to experience the fuss of using a router. Some will want to stick to using just one ethernet cable - the one to their PC, not wanting to plug it and out in and from the Xbox 360 and PC all the time. If that's you, the guide below will help you get rid of your troubles once and for all.

DEF - Internet Connection Sharing: Internet Connection Sharing (ICS) is the name given by Microsoft to a feature in recent versions of its Windows operating system (as of Windows 98 Second Edition) for sharing a single Internet connection on one computer between other computers on the same local area network. It makes use of DHCP and Network address translation (NAT).

ICS routes TCP/IP packets from a small LAN to the Internet. ICS maps individual IP addresses of local computers to unused port numbers in the TCP/IP stack. Due to the nature of the NAT, IP addresses on the local computer are not visible on the Internet. All packets leaving or entering the LAN are sent from or to the IP address of the external adapter on the ICS host computer.

On the host computer the shared connection is made available to other computers by enabling ICS in Network Connections, and other computers that will connect to and use the shared connection. ICS offers configuration for other standard services and some configuration of NAT.
(Wikipedia)

Connecting to XBox Live: Internet Connection Sharing (ICS)

Requirements: PC with ethernet networking card, USB ADSL modem, existing broadband enabled phone line with socket, crossover ethernet cable

After the setup, your network should be pretty similar to that illustrated in the picture below.

1. Install the ADSL router software if it is not already.

2. Switch off the PC, ADSL router and XBox.

3. Now connect one end of a crossover ethernet cable to the XBox and the other end to the ethernet port of the PC.






4. Now switch on the XBox, PC and ADSL router.

5. We must now alter the network settings on the PC. Go to Start and click on Control Panel. Then click on Network and Internet Connections. Then click Network Connections.

6. You should see a window similar to the one shown in the picture below. Right click on the connection used to connect to the internet (it contains the name of the modem you use) and then click Properties.










7. On the new window, click on the Advanced tab located on the top of the window.









8. Now select the option to Allow other network users to connect through this computer's internet connection.

9. Now click on OK.

Note - For PPoE, settings must be altered on the XBox 360 also. On the XBox dashboard go to the System blade. Select Network Settings and then Edit Settings. Press right on the control stick to go to the Other Settings pane. Select PPoE settings. Alter the username, password and service name (ISP) settings.

Thanks iamlucky18 up on the Xbox 360 forums for the helpful information.