I need to create a local RHEL5 Update Server to help eliminate the number of servers exposed to the web. All the local rhel5 servers need to be able to use this server as a repository for patches. I have a server registered with Redhat and would like to use yum to accomplish this. It is possible?
I think the project you are looking for is called spacewalk and allows you to run your own server for the Red Hat system management software. However, AFAIK this replaces rather than works in conjunction with the Red Hat servers. If you want an in-house server that inter-operates with the Red Hat servers, speak to sales at Red Hat. They have a product for that called RHN Satellite, but I haven't used it.
Here's a link to RHN Satellite, thanks for the pointer weeheavy.
mrepo is what you need. A howto
You could configure Squid on the server to allow the proxying of Yum from the private subnet to the Redhat update servers. It can also cache packages, meaning it will only download a package once for all updates.
http://wiki.xdroop.com/space/Linux/squid/Configuring+a+Yum+Cache
Your question appears to imply that while you have multiple RHEL servers, only one is registered with RHN. If this is because you do not have subscriptions for those servers your question amounts to "how do I get more than I'm paying for?".
If your aim is genuinely to limit exposure, that problem is solved by firewalls...