System Link is the method for connecting Xbox or Xbox360 systems together for the purpose of multi-player gaming on system link compatible games.
A 'system link cable' is used to make the physical connections between the games consoles.
For the original Xbox, it was necessary to use a cat5 crossover cable which is different from standard cat5 ethernet cables in that some of the wires are reversed. A standard cat5 cable can be used, however, if you're going to use a hub or switch between the xbox's.
The Xbox 360 system link allows for standard cat5 cable whether using a hub or not and is a lot more feature rich with regards to multi-player gaming in general.
Of course there are 'official' system link cables to choose from too, but is this is worth the extra money? Possibly not.
To use system link, you must be playing system compatible games, so make sure the games you want to use in this way are supported.
To find out more about system link in general, click here for a great System Link information site.