Probably best go for windows, XP or 7. Jim them.
Does it have any PCI slots? If so get a PCI SATA card.
WiFi is probably going to be slow and frustrating.
Ideal locations... Under the stairs or attic.
I use a USB HDD and CDs / DVDs for more important stuff.
I have a RAID1 setup in my PC, but I've learnt the hard way not to treat it as a backup.
For an OS, you might want to consider Windows Home Server. It's quite cheap, even if you don't get help from Jim.
It provides backups of clients, and also has some basic management of backup to USB drive or whathaveyou. Also provides a DLNA media server, and a web interface for uploading/viewing your files/videos/photos, etc.
I've been running a V1 (based on server 2003) box for a couple of years now, and am now migrating to 2011 (based on server 2008 R2). It's pretty good at 'just working'
What Matt said.
If I didn't already have more than the amount of drives to put in one of those I'd buy one myself.