I don't mind System 7 myself, it will always define the Classic OS to me. It was how I first saw the Mac OS in magazine screenshots and was on the first Mac I ever bought, an LC475. OS 8 and 9 always seem like half-assed efforts to me. Where MS were at least trying to drag Windows out of the 16 bit 3.1 doldrums, Mac OS just kind of stagnated after version 7 (At least until OS X that is )

Given the choices, 7.6.1 would be the sensible choice since even though 8.1 would be more optimised, it would probably choke in 32MB of RAM.