Have you figured out yet? If so can you please post? I am going out of my mind trying to get this thing to work. So far it is the biggest waste of my time.
Here's what worked for me using a System Link cable [crossover] after spending hours trying every configuration under the sun:
1. Make the I.P address and Subnet Mask on your Xbox the same as is on your PC. [To figure out what the IP and Subnet values are on your PC go to Start and select Run. Then type in cmd. Then type ipconfig in the window that pops up.
2. If you have a wireless network running on your PC, disable it. This is what was key for me.
Xbox's are configured to look for an Internet connection for Xbox Live when there is a network cable plugged into them. If you have a wireless network connected to the Internet running while you're trying to use a direct connection to a PC the Xbox will try to connect to Xbox Live through your wireless connection instead of your PC.
Let me know if this helps.