Yes that will do nicely, we have a dozen of them floating round the repair department.
Correct about removing old drives and setting up new drives as RAID 1, just remember you might have to update the firmware to format the drives - you can go back after without problems.
I'm not sure if you can restore using the built in USB socket - all our DNS-323s are used as print servers and we have enough space to store everything, if necessary, on out ProLiant storage system.
When we are out on a service call we use an available USB port on the clients computer, we have a CD with various drivers and IFS available.
Since you are using windows read the sticky at http://forums.dlink.com/index.php?topic=41395.0 which gives links to the IFS - just find one that works for you.
Just remember that unless you do something stupid with your old drives, like formatting them - windows will try to do that if you plug into a USB port without the IFS installed, you have two copies of your data safe and backed up.