Given that no Happy Mac appears in the absence of a System File, it must somehow be finding it or at least becoming aware of its presence.

I'd suggest formatting an 800K disk, copying System 1 onto it (presumably only using the "first" 400K), and then seeing how far the boot up process gets. If at least the Happy Mac appears, I'd then delete the System File and ensure that it appears no longer.

I always understood that where there was overlap, HFS control structures were expansions of MFS ones. If that is the case, it is not surprising that the 64K ROMs can make some sense of an 800K disk.

Ken