I've been running RAID1 for years now and when I moved to 7.0 I upgraded my HDDs at the same time again in RAID1.
Now I find myself running out of HDD space again (only a few months after upgrade from 120GB to 300GB). So instead of upgrading the HDDs again, I'm thinking to switch to RAID5 or possibly RAID6.
I don't think going to RAID5 will solve your capacity problem. It sounds as if you need a SAN instead.
Have people generally been happy with the performance of the software RAID5? My guess is yes as for most of our Apps we are likely ethernet bound anyway.
Yes but RAID1 is cheaper and sufficient. A SAN is better.
Have you had reliability problems of say having more than one drive go at a time?
I have not but I have run only a handful of RAID5s -10-15 at most. Never more than one drive failed at a time in any system and then rarely.
I'm a little paranoid about this...
You shouldn't be.
Then again maybe I'm thinking too hard about this...
Yes you are. A SAN is the answer to the capacity problem, not RAID5 or 6, because RAID5&6 deal with insuring against disk failures not capacity.
I suggest you use a basic RAID1 for the SME and add a SAN mount that you point your users to for their data. Search the forums, there must be something somewhere on using a SAN with SmallMediumEnterprise Server 7.x.