Trying to set up a caching proxy server using a router running tomato firmware. I'm not sure if this is even possible, but figured i'd give it a try.
It is theoretically possible, but with one major caveat - storage. Not sure why anyone would want to try it though. Good luck!
You will need to solve the storage problem as Chris suggested. You have several options depending on your router's capabilities:
Your next problem would be with RAM. Unless you got one with 64Mb or more RAM, you will truly be pushing the limits. However, you can possibly do with less RAM if you configure the caching software to reduce the RAM cache and use only the disk cache.
If all you want is to have a caching proxy on your network, why not consider setting a proper one up as a transparent proxy and the configuring your router to force HTTP connections through the external proxy.