You wrote "Micro$oft's" -- and you want a serious answer?
Is it viable to store PST files on
this server for users to read from and
No, it is not. MS strongly advises AGAINST using network shares for PST files. And you should not have them sort of in the first place - OST files are a lot better ;) But PSD files on a network share is a LOT of trouble.
What kind of hardware horsepower and
network architecture should we have
for this kind of thing?
Depends a lot what you do with it. No joke - 120 people could be anything. Developers? Forget it - let them work from local disc, check into source control anyway very often. Then - it is not a lot they do with home dirs anyway.
Graphics people keeping 100gb each? Totally different story.
Under MOST circumstances and a proper infrastructure in place (which you obviously do not have) I would sa about 200mb per user are good enough, and a RAID 5 of decent discs on a cheap NAS should be enough (and you don't have to HACK anything here - a good NAS has all the functionality you need).
MS AD is strongly encouraged - unless you want to look like an idiot ofr a lot of things. THen you talk 2 computers. Or do you think you still look so great and smart saving some money from Micr$soft when 120 people can not work because you were too cheap to buy a redundant set for them? Linux or not, go to 2-3 computers. As in hardware. 120 people cost a LOT of money on a day when your only server decides to retire.
Then spend some money on books. YOu know, the style without naked women. Read up what active directory is really bringing to your table (hint: it is not only central authentication) and maybe you sit down and run some numbers - Micro$oft may not look so stupid then anymore. You may even want to invest (0 money) into SharePoint Foundation 2010 (fresh released) - very nice powerfull intranet for free.
Same with exchange - btw. I know of no alternative to that one in the open source community. Maybe it helps you guys NOT to go bankrupt? I Mean, seriously - no money? How you pay the people? Even in india and with indian wages the cost for the licenses are not exactly THAT high compared to the fact that your people are not monkey being paid a banana per day ;)