I've been using Squid daisy-chained to Privoxy on my NSLU2 for years and now it runs on my Sheevaplug, well at least it used to until my Sheevaplug died.
As for transparent proxying, if you have a DD-Wrt or OpenWrt capable router then you can easily do this via iptables. Redirect all outgoing request on port 80 to your Sheevaplug.
This is what I have on my router's iptables:
iptables -t nat -N Proxy
iptables -t nat -A Proxy -i br0 -s 192.168.1.77 -j RETURN
iptables -t nat -A Proxy -i br0 -p tcp --dport 80 -j DNAT --to 192.168.1.77:3128
iptables -t nat -A PREROUTING -i br0 -s 192.168.1.0/24 -d 192.168.1.0/24 -p tcp --dport 80 -j ACCEPT
iptables -t nat -A PREROUTING -i br0 -s 192.168.1.0/24 -d ! 192.168.1.0/24 -p tcp --dport 80 -j Proxy
iptables -t nat -A POSTROUTING -o br0 -s 192.168.1.0/24 -p tcp -d 192.168.1.77 -j SNAT --to 192.168.1.1
iptables -t filter -I FORWARD -s 192.168.1.0/24 -d 192.168.1.77 -i br0 -o br0 -p tcp --dport 192.168.1.77 -j ACCEPT
Outgoing requests to port 80 from all IP addresses (except requests coming from 192.168.1.77) are redirected to 192.168.1.77 which is where Squid+Privoxy runs. Then on my squid.conf:
http_port 3128 transparent
and
cache_peer localhost parent 8118 0 no-query no-digest
always_direct allow ftpproto
never_direct allow all
to chain with Privoxy