Okay, one thing at a time.
1) External Drive: GREAT IDEA! It will work, just attach to system and copy all data over, make sure it's all there. Shut down, decommission and detach old RAID drives. Install new internal drives and build new RAID. Create new partition and format. Copy everything over from the external drive. Data migration complete. Possible Down Side: USB and FireWire are SLOW. 120GB isn't that much to copy, however.
2) How can you move the data? File -> Copy. Paste into external drive once attached and auto-detected.
3) Yeah buying a new RAID adapter with online expansion is a GREAT idea... for the *future*. RAID LOGICAL DRIVES CANNOT BE PORTED FROM CONTROLLER TO CONTROLLER. (Yes I'm a server guy in real life, this has been true since the bad old days of SCSI) ALL OF THE RAID ARRAY CONFIGURATIONS RESIDE ON THE RAID CONTROLLER. If you buy a new controller and attach old drives to it, all it will see is 2 drives that it can build a NEW RAID ARRAY from. Which leads me to my next point:
4) WHEN you build a NEW ARRAY, it WIPES the drives and leaves you with a LOGICAL DISK/VOLUME with NO PARTITION. (Blank "virtual" disk, no files)
5) When you "REBUILD" a RAID ARRAY, you are RESTORING THE DATA INTEGRITY OF A EXISTING ARRAY. Adding a 500GB HDD to a 120 GB RAID1 means you have... wait for it... 120 GB more space you can "expand" the partition to cover with something like Partition Magic (and also puts you at RAID 5 with 3 HDD's) That's because the basis disk of the RAID was... 120 GB! But this will ONLY work if you have a free port on the RAID adapter AND the adapter supports on-line migration, which yours does not. So this is right OUT.
6) On-line Migration solves your problems... but your EXISTING controller does NOT support it. And creating a new array out of existing HDD's WIPES them as I mentioned.
7) Which leads me all back to where I started. You need to somehow create a NEW RAID ARRAY that's blank and somehow preserve your data and get it on the NEW, BLANK ARRAY (with blank partition).
You might think you're bright, but you're obviously not experienced with data migrations. Feel free to try it Your Way, if it does not work and you end up losing data, well, I warned you how RAIDs work. The added complexity is why I don't suggest it for Casual Home Use.
No LANFest 2K8! :(
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