Stands for "Network Address Translation." NAT translates the IP addresses of computers in a local network to a single IP address. This address is often used by the router that connects the computers to the Internet. The router can be connected to a DSL modem, cable modem, T1 line, or even a dial-up modem. When other computers on the Internet attempt to access computers within the local network, they only see the IP address of the router. This adds an extra level of security, since the router can be configured as a firewall, only allowing authorized systems to access the computers within the network.
Once a system from outside the network has been allowed to access a computer within the network, the IP address is then translated from the router's address to the computer's unique address. The address is found in a "NAT table" that defines the internal IP addresses of computers on the network. The NAT table also defines the global address seen by computers outside the network. Even though each computer within the local network has a specific IP address, external systems can only see one IP address when connecting to any of the computers within the network.
To simplify, network address translation makes computers outside the local area network (LAN) see only one IP address, while computers within the network can see each system's unique address. While this aids in network security, it also limits the number of IP addresses needed by companies and organizations. Using NAT, even large companies with thousands of computers can use a single IP address for connecting to the Internet. Now that's efficient.