If the rear spacing reduced to 126 when the wheel was installed, then in all likelihood you have a 7 speed rear freehub. You can either install an 8-9-10 speed freehub (most Shimano ones fit, cost about $20 on eBay) or go to a 130 OLD rear wheel. Nothing wrong with 7 speed, in fact nothing wrong with the RSX/600 component mix unless you just want more. Microshift brand 7 speed STI's will shift those components just fine.
However, if the frame is solid and in good condition, it can certainly accept any upgrade you want to throw at it -8/9/10 or 11 speed- as long as it's a 130 OLD rear hub. See pics for maximum vintage Cannondale upgradage:
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