I use an 80Gb HDD with Windows 98, and it's not a problem (I believe 120Gb is the upper limit). But your memory will be a problem.
I run a dual-boot system with 98SE and XP, due to needing XP for compatibility with some of my customers' setups. I've kept 98 to avoid having to update all my old hardware and software drivers etc., but I've configured XP to look like 98 ("classic" configuration, I think) and am gradually transferring things over to it. If it weren't for my old stuff, I would be happy to run with XP alone. Since yours is all new, I would recommend that you go with XP.
Like you, I'm not convinced of the advantages of RAID -- especially as with some of the possible configurations you seem to lose all of your data if only one of your RAID drives goes phut. Regular backups seems to me to be best for home users.