There is no such thing as a 3.5" hard drive that has one terabyte of capacity. The largest hard drives are around 500GB, so in order to reach a terabyte of capacity, you'd need to set up a RAID using multiple large hard drives.
I would recommend getting a Sonnet Tempo ATA/133 RAID card, and three or four inexpensive Western Digital 250GB special-edition drives. Use one 250GB drive as a boot drive for Mac OS X Server, then use the remaining drives as a mirrored or striped array.
You can use Linux, but I would recommend running straight Mac OS X or Mac OS X Server to eliminate incompatibilities between the different versions of network protocols (AFP, SMB, etc.).
If you could elaborate a little more on what you're looking for in a server (as servers vary like the colors of the rainbow in terms of what they do and what services they provide), perhaps we could be more specific in our guideance. Do you want file sharing? Server-managed user accounts? Internet access/filtering? Print services? FTP? Hosting a website?