Have you made sure the motherboard does not have an update that would let the mobo see more than the 137 gig's. The OS should let you see the full size of the drive, but it might be better to make 2 partisions just to be on the safe side. Make an OS system partition, and the rest of the drive as a data partision.
The other thing to think about is Win7 system requirenments - I ran win7 on an old 1 Ghz w/1 gig ram and it ran VERY slowly, which I think is the win7 minimum requirenments; think like running notepad slowly. Even for basic music playing, you may want to consider running XP or a slimmer linux build, even if your just jamming tunes in your garage.
On point. And if it's not connected to the Internet regularly, as you indicated, an old XP SP2 installation will be perfect once you get past WPA. It will run acceptably fast and you could run a really lightweight antivirus program like e.g. Avira.
Referring back to the OP, digital audio support is not really a big deal, lots of XP-era soundcards supported optical-out and all of the decode happens in the receiver anyway.