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The Quadra 700 (and 900) can run any system version between system 7.0.1 and Mac OS 8.1. Which system version is right for you is a matter of which features you want/need, how much RAM you have installed, wether you would consider buying a system version on CD or stick with what you have on diskettes, CD(s) or what is available for download from Apple and wether you are planning to use software which require a certain system version. The older system versions demand less RAM and hard drive space, but they have fewer of the modern features built in, so for machines with enough RAM, a newer system might be better. Many of the newer features are available even to older systems with additional innstallation of control panels, extensions and other software.
Allthough a Quadra can run Mac OS 8.0 and 8.1, these system versions demand lots of RAM, so unless you have 20 MB or more, they might not be very useable. They also use a lot of hard disk space. I have got 8 MB of physical RAM (16 with RAM doubler) and currently I am using H-7.6.1. H is Apple's code for norwegian software. Unfortunately 7.6 and/or 7.6.1 isn't available for free download from Apple and since 7.5.5 is more or less the same system but with fewer of the additional "modern" features as part of the system, it is probably the best choice if you haven't got a CD with 7.6.1. You just have to install a few more extra system extensions and control panels. Even with 7.6.1 there are a couple of extras needed to be installed for maximum useability in the modern world and on the internet. System7today.com have this page of ultimate updates for Mac OS 7.6.1 on 68k Macs.
I have also tried H-7.1 (which I have original diskettes for) and H-7.5.3. My idea was trying to use the smallest and fastest system possible since my Quadra only has 8 MB of physical RAM (16 MB with RAM doubler). My main reason for changing from H-7.1 to H-7.5.3 was that I had trouble setting up MacTCP and therefore had trouble connecting to other computers and the internet. In 7.5.3 it is possible to use open transport, and with it DHCP, which means that there is no configuring of IP adresses and such needed. (I'm slightly IP challenged and I have a dynamic IP adress with my internet provider.) With both 7.1 and 7.5.3 I used Tyler Sable's guide to installing a "modern" system 7.0.1 and System 7.5.5. However I found system H-7.5.3 with Sable's additional "modern" features quite unstable with lots of bombs and sudden stops in the middle of processes, especially network related processes, so I thought I would give H-7.6.1 a new chance. So far, H-7.6.1 has been much more stable than H-7.5.3. Unfortunately, the norwegian version of 7.5.5 isn't available for download, but H-7.5.3 is.
The one feature I would love to have available that comes in Mac OS 8.1 is the ability to read HFS+ volumes. It would make it easier to access some software that is actually compatible with system 7 and 68k macs, but that is distributed on a HFS+ volume in the form of disc images. (I have come across a few of those.) It would also make burning CDs for use on the Quadra from other machines much easier and faster. I am now using an external SuperDrive through the USB 1.1 port of my iBook Clamshell (G3/300 MHz) to burn CDs for the Quadra, since the version of Disk tools in Mac OS 10.6 "Snow Leopard" on my MacBook Pro has no support for creating disc images or burning CDs with HFS-volumes. Mac OS 10.4 "Tiger" on my iBook Clamshell supports HFS volumes. After I got my internet connection working (I needed open transport on a CD to do that), I have been using FTP to transfer files between my Quadra and my MacBook Pro.
Here are some information about different system versions compatible with the Quadra: