So after much screwing around, I was able to delete the password protected "Startup" drawer.  Removing this stopped the Mac from booting to a "sad mac".  

I tried everything to get Macsbug to work and I did find a version that seemed to work but would go directly to the Macsbug prompt and freeze everything else.  It was very strange but if I copied FEdit to a floppy and boot with the floppy, I could not open the disk to see the apps on the floppy without it "bombing" and being forced to restart.

Anyway, after somehow removing the "Startup" drawer, I recreated it and put the system files in it and it boots.  "Drawers" are like folders so even though I have a password protected "SYSTEM" drawer that will not mount because it's password protected, it's not really taking up any space because there appears to be nothing in the "SYSTEM" drawer because I still have 9+ MB free (it's a 10MB drive).

I can't format the drive because it asks for the password but that's okay because the drive is working fine.  After copying FEdit to the drive, I can see the folders in it but can't do much. The "SYSTEM" drawer doesn't show up so I can't edit it.  Anyway, I will go at this sometime in the future but for now, it's completely operational.

Thanks for the advice.