iMac -> RAID unit?

I recently acquired an iMac G3 (slot-loading, 600mhz) with a 40gb hard drive in it. I'm wondering if it would be possible to make the computer automatically back up certain folders on my main computer over the internet. Basically it would just be a backup unit.

And also, would it be possible for me to put a second IDE 40gb hard drive in the imac? Possibly replace the disc drive with a hard drive? How hard would this be?

You could replace the optical drive with an HD if you like. You will need the appropriate IDE adaptor in order to connect it, and you'll need to wire up another molex connector to power it with, but its not so tough.
As for using it to backup to, that is easy enough to do. You can just have it run AFP. Your choice of auto backup software is up to you though. Intego personal backup is cheap, simple and cheerful though.
If you want to backup over the net from outside your house, you will need to open a port in your firewall and point it the iMac on port 548. Then you need either a static IP or a dynamic DNS account. Helps to have a router which supports dynamic DNS too.
I recommend a Netgear DG834 (G if you want wireless). I can talk you through setting one of those up if you want. Or just set it up remotely for you.