From the homepage:
This basically means that a proxy server will be run on your computer which allows only connections to be made by your computer by default. I'm sure that if you wanted to, you could set it up for "multi-user networks"... but for our purposes today, we won't need to do this.
1. The first thing you will need to do is Download the latest (stable) release of Privoxy. At the time of writing this tutorial, the most recent release is 3.0.3.
2. Once you have this done, install it. When you are asked to run Privoxy after it is installed, it is a good idea to check yes. Also, I would recommend that you run it at start up and add it to the start menu. So, basically just don't change anything... just install it with all of the default options unless you have a reason for changing one of these options.
3. Ok, so there's this blue "P" icon sitting in your system tray now. Also, there might be a big blank white window that comes up with the title "Privoxy".. just click the X and close this window. It's ok to click the X because it just minimizes the window the system tray icon. To open it again, just double click the blue (or green) "P" icon in your system tray.
4. Start up K-Meleon and either go to (Edit > Preferences > Proxy) or (Tools > Preferences > Proxy). You should have "Direct Connection to the Internet" set as your option.
5. Click the "Manual Proxy Settings" radio button and fill in the boxes to the right of HTTP with the following information: 127.0.0.1 (for first box) 8118 (for "port")
6. Your settings should look similar to http://bst82551.ath.cx/pics/SS/proxy.jpg.
7. Click "OK" and try going to a website you know has lots of banner ads. Engadget often has a few ads.
8. Have fun browsing ad-free!
Extra Info: You can find help on editing the Privoxy filters and actions by visiting the Quickstart Guide to using Privoxy.