1. Yeah, sure, you can install the OS on that drive.
1a. With the 2 IDE ports that are on the motherboard, you can attach 4 devices. There is a primary and secondary port, and each port supports both a master & slave. Just keep note that optical drives will use the IDE ports also.
Getting a SATA card would work, as long as you have an open PCI port on the motherboard. Keep in mind that some cards have RAID, and others do not. If you ARE getting a RAID card, make sure to look into the different flavors of RAID, the most popular ones being RAID0, RAID1, RAID0+1, and RAID5 and JBOD.
2. You will want to enable file sharing on the computer. Also, if you have a printer, you can connect the printer to it, and share the printer over the network. This will allow any host on the network to access both the storage on the computer (only the folders you share of course), and also allow access to the printer.
3. The only downside to using a full-fledged PC for this task, is that it consumes more power than a smaller NAS (Network Attached Storage) device. At this point, you are probably better using the PC anyways though, since you already have it, and don't have to go and purchase it.
Here is an example of a NAS device I mentioned.....
2-Bay Network Storage Enclosure - DNS-323 by D-Link. I actually own one of these (listed in my sig), with two 500 Gig drives in RAID1.
Good luck on your project.