Well it should be pretty easy to find some old RAM chips lying around with everyone upgrading to newer machines and RAM types. And you should be able to get it for just about nothing. I would certainly upgrade the RAM, especially if you want to run a caching proxy.
Having said that I use RedHat for all of the above. In fact my firewall/vpn/proxy/dns/dhcp/web/more server is still running RedHat 6.1 because it's worked so well for so long I've never done a full upgrade of it. And I was using RedHat 5.2 to do it before that. Sure I upgrade specific pieces of it now and then but not a full upgrade.
If you do decide to use RedHat 7.2 the default firewall software would be iptables/ipchains. This will also do your masquerading. Squid for your proxy (best proxy server out there) and it's config file would be found in /etc/squid/squid.conf. For DHCP you would install the dhcpd package and the config would be in /etc/dhcpd (oddly enough). DNS you would install bind* RPMs.
And if you are new to all of those things and want a nice graphical way to set everything up and probably make your life very easy I would suggest downloading the latest "webmin" RPM from
http://www.webmin.com and install it. You can configure all of those services from webmin. Webmin is probably the best configuration utility I have found. I personally never use it and prefer to configure everything manually but my partners love it. And look at
http://www.webmin.com/support.html for a list of all of the supported operating systems. All of the popular Linux distros, Solaris, AIX, HP-UX, SGI, *BSD, and even OSX and Darwin and many more. It really is becoming a sweet administration tool and I would not be one bit surprised if it will become the default on nearly all *NIX like OSs very soon.
Don't forget after installing to look at the errata section on RedHat's web site and get any bug/security RPMs applied. And most important, turn off any services that you do not intend to use. (telnet, ftp, nfs, portmap, finger, etc).
[ April 12, 2002: Message edited by: VoidMain ]