Most likely too late, but...
After initializing and formatting, partition as desired.
I can recommend partition sizes If you give some more info and what you plan on using it for.
If your happy with how Windows 7 is running now, the easiest way is to Clone it.
If you want an earlier, fresher, version (if I understand your backup strategy) Clone your original installation on the small HD.
You can use any backup, but will need to do a fresh install on the new HD then run your restore of the backup.
Sorry for the late reply, real life and that pesky paying job keep getting in the way of what I enjoy doing.
I know the feeling, I got an i5 screaming at me, keeps getting louder and louder...