I run a somewhat similar setup to yours. P3-800 with 256MB RAM and mirrored 60GB IDE 5400RPM drives, RedHat 7.3. It's running Squid proxying for about 35 machines.
In RedHat 8.0 for some reason I've not dug into yet they seem to be favoring Privoxy over Squid now. Taking a very quick look at http://www.privoxy.org
it looks good. I'm sure Squid will run on RH8, you just might want to look at this other one and see if it suits your needs any better. RedHat is liable to have easier setup/administration of it since it seems to be the new proxy of choice for them. I have Squid tweaked how I like it though and am reluctant to change. Banner ad removal, pop-up window auto-closing and I bandwidth limit on a per file extension/mime type basis. .JPG files get a decent speed, .MP3s crawl at a very slow speed.
Other than that my only comment would be that you're talking about running quite a few apps with open external TCP/UDP connections on a *firewall* machine... Be careful.