First, we need to make sure all the proper options are set in your kernel. If you are using a stock kernel from your distribution, transparent proxying may or may not be enabled. If you are unsure, the best way to tell is to simply skip this section, and if the commands in the next section give you weird errors, it's probably because the kernel wasn't configured properly.
If your kernel is not configured for transparent proxying, you will need to recompile. Recompiling a kernel is a complex process (at least at first), and it is beyond the scope of this document. If you need help compiling a kernel, please see The Kernel HOWTO
The options you need to set in your configuration are as follows (Note: if you prefer modules, some (but not all) of these can be built as modules. Luckily, everything that is not modularizable is probably got in your kernel anyway.)
Once you have your new kernel up and running, you may need to enable IP forwarding. IP forwarding allows your computer to act as a router. Since this is not what the average user wants to do, it is off by default and must be explicitly enabled at run-time. However, your distribution might do this for you already. To check, do ``cat /proc/sys/net/ipv4/ip_forward''. If you see ``1'' you're good. Otherwise, do ``echo '1' > /proc/sys/net/ipv4/ip_forward''. You will then want to add that command to your appropriate bootup scripts (depending on your distribution, these may live in /etc/rc.d, /etc/init.d, or maybe somewhere else entirely).