DK:
The concept makes sense: If you can accept the risk of drive failure, a computer with MJ as the database manager integrated into a home audio system is far more flexible than any CD jukebox. But I'm not sure if what you're looking at will do what you want. Depending on how demanding your ears are, first question is if the drive is large enough to handle your collection.
You don't say what OS you want to run, but that's going to take up drive space. Ditto MJ. (XP on my unit has a 1.4+GB footprint. MJ is pretty slender - around 50 MB)). So, say you're down to around 8.5GB +/-.
You can find a variety of views on compression formats and target file sizes in this forum. Myself I think that 128 is marginal quality in MP3. However, use that for the moment just to make some calculations.
CD length is going to be all over the place - mine run from 40 min. on Savoy reissues to 70+ - but assume an average of 50 min. And further assume 350 albums at this average length, for a total of 17500 minutes of play time.
At 128kbps, 1 minute of music translates into 0.91MB of file size, so without further refinement, your collection will absorb 17-18GB of space, unless I've misplaced a decimal somewhere. With 8-9 GB free, you're barely half way there. You can't squeeze out any more space without dropping your quality completely off the charts, particularly if you're into higher end audio. (I'll hear from WMA fans on that.)
At the other extreme, it's harder to estimate file size per minute with a lossless format (APE) because of differences in the bitrate of the source material, but assume something in the 500-600 range; that will occupy about 4MB of drive space per minute of play time, or around 70GB for your 17,500 minutes of music.
Long way around, but with storage so cheap, why not move up in size? Quick look at Pricewatch: 80GB drives for $89. That would allow you to encode your entire collection in true CD quality with room to spare, and if you ever decide to work with a lossy format, you can do so whenever you'd like.
Others will have better ideas on access time, adequacy of PIII, clock speed, etc. Ditto codecs.
If anyone's fitting me for a dunce's cap, I'm a Small.
HTH