A System 7 startup disk will not work. You must have Mac OS 8.1 or better, WITH the Mac OS ROM file. Anyway, i'm guessing that your system folder may have become "unblessed". When you get your hands another boot disk (anything OS 8.5 and up is guaranteed to work), open the hard drive and see if the System Folder has the System Folder icon still. If it doesn't, if it has the same icon as a regular folder, open the system folder and close it again. This should "re-bless" the folder. Then reboot, and if the drive, and the System Folder are both healthy, all should be well.