You have the right idea, only 160GB of 500GB will be used, even if you replaced all the 160GB drives in the machine you will not get it to expand to 500GB automagically, depending if your raid device supports it, you would have to go into the raid setup utility and change the size of the array through its resize utility (if supported).
I cheap and dirty work around to this is to create a secondary array and move all the data off the first array then remove the first array completely then just add more 500GB drives in the place of the 160GB drives.(Most cards these days support online expansion).
EDIT: Mark Pettit beat me to it
Last edited by /dev/random; 09-17-2012 at 11:08 AM.
Reason: Same answer as above.