There is a good chance that you will triumph in the end, but I advocate that you not install system software before you have let DFA, and HD SC Setup, do their special things to contain the magic smoke. Run DFA to Verify the HDD, and to Repair it if need be. Repeat the Repair several times if errors continue to be reported, until none is. Then only re-install the System 7.0.1. When the HDD mounts on the desktop with no demur it will be time to grab the files that you need, by copying them to diskette directly.

Bonne chance.

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