If your box is connected to two networks, it may still make sense to say N here, namely if you want to turn your box into a firewall protecting a local network from the internet. If your setup is more complex, say you are connected to three networks and you want to act as a firewall between two of them and route traffic for the others, you need to say Y here and enable IP firewalling below. This is code for addressing several networked computers at once, enlarging your kernel by about 2 kB. Some versions of gated, the program which constantly updates a networked computer's routing tables, require that this option be compiled in. If you want to enlarge your kernel by about 2kB and configure your Linux box as a firewall for a local network, say Y here. This keeps track of your IP network traffic and produces some statistics.
Most people say N, however.
If you don't understand a word, say N and rest in peace. This keeps tiny packets from telnet and rlogin from congesting Wide Area Networks. You may wish to disable it if you run your X-server from across the network, or if multiple byte key sequences are delayed.