Rather than messing with partitioning the Windows drive (I'm using Win 7 as well), I purchased an inexpensive external USB drive and dedicated it solely to Linux. I then set up the boot order on the notebook to look for the USB drive first. If the USB drive is not plugged in, it defaults to the Windows drive. I've finally managed to track down a drive caddy that is designed for the second drive bay on the notebook, so I may end up going that route and using the USB drive as a backup device.
As for the lilo changes, whenever you make changes to lilo.conf, you should run lilo -v at the cli. This will commit the changes you make to the configuration file.