Is the 127 note values in MIDI musically significant (certain number of octaves or something)? or was it set at 127 due to the binary file format, IE for the purposes of computing?
Answer
In the MIDI protocol there are status bytes (think commands, such as note-on or note-off) and there are data bytes (think parameters, such as pitch value and velocity). The way to determine the difference between them is by the first bit. If that first bit is 1, then it is a status byte. If the first bit is 0, then it is a data byte. This leaves only 7 bits available for the rest of the status or data byte value.
So to answer your question in short, this has more to do with the protocol specification, but it just so happens to nicely line up to good number of available pitch values.
Now, these pitch values do not correspond to specific pitches. Yes it is true that typically a pitch value of 60 will give you C4, or middle C. Most synths work this way, but certainly not all. It isn't even a requirement that the synth uses the pitch value for pitches! MIDI doesn't care... it is just a protocol. You may be wondering how alternate tunings work... they work just fine. It is up to the synthesizer to produce the correct pitches for these alternate tunings. MIDI simply provides for a selection of 128 different values to be sent.
Also, if you are wondering why it is so important for that first bit to signify what the data is... There are system realtime messages that can be interjected in the middle of some other command. These are things like the timing clock which is often used to sync up LFOs among other things.
You can read more about the types of MIDI messages here: http://www.midi.org/techspecs/midimessages.php