Boot drive failed - what options for a replacement

I have a Dimension 8400 running BIOS A05 (if I recall corrrectly). The SATA C drive supplied with the system has recently crashed and will no longer boot up. I've tried various  diags but they all fail. I also got a USB disk adapter to try accessing the drive from another computer... the disk spins up but I can't see the drive. 

What I'd like to know is what options/constraints are there in the choice of a replacement drive? (I'm wondering if I'm limited on capacity. The original drive is a WD740GD-75FLA1 (74GB). Could I replace this with a larger capacity SATA drive (I don't mind if the replacement is a WD drive again or not.)

And, keeping in mind the BIOS, will I need to update that when I replace the HDD?

Further, this good old machine still runs XP SP3 and I'm considering going to Win 7 at the time of installing the new disk. Any issues to consider re the choice of drive?

BTW - some time after buying this PCI added a second hard drive - a 250GB SATA drive. Do I need to consider this in choosing the total online disk capacity I'll have once the new drive comes along? Oh, and while I'm talking about this second drive - this works just fine with the USB adapter so my problem looks most likely to be a disk problem as opposed to say, a cable or power supply issue.

Thanks in advance for your feedback.

Andy