I can give it a shot.
1. I'm currently going to use the single drive to back up from two laptops. Large image and graphics files, movies and general backup. Eventually, I will purchase a second drive for the 323 and use one as a storage device and one as a backup. Question - When I install the second drive can I begin a RAID configuration without formatting the first drive? Is there anything I need to look out for when I install a second drive? And do I need RAID?
I'm not sure about keeping the data on the drive when converting to a RAID, but I doubt it would work.
Going by what you describe you want 1 HD for backup and 1 HD for storage, so no, you wouldn't need a RAID (without going into much details: with raid 1 - mirror - you would have an exact copy on both drive and with raid 0 - stripping - if one of the two disk failed you'd lose everything on both disks) Also note: if you plan on backing up your laptops, you might as well think about backing up your Storage HD too.
2. One laptop runs XP and one runs Vista Home. Is there anything I should know that might cause issues with these two connecting to the 323?
It's working fine here with Vista x64 and XP pro, it's pretty much OS independent as far as I know.
3. When I set up my ITunes server, can more than one computer access it?
Yes, it should show up on all computers
4. Firmware. There seems to be large numbers of issues with 1.06. Am i safer by starting with 1.05?
I have no problem with 1.06 so far
5. Is it possible (or will it be in the future) to attach a harddrive to the USB port to expand the overall capacity of the unit?
I haven't tested this, but I think it's a print server port only.