There's a few write-ups on the internets as to how to set up a RAMdisk. I used to do it with a 7.5 disk tools disk on my powerbook 180 way back, and a RAMdisk, I'd have it make a 2MB RAMdisk at boot, copy the files over and reboot off it. worked great.
as far as other files... I think you'd need to make a 7.1 (possible for the 650?) bootdisk to get the necessary space for TCP/IP, the Ethernet extension, MacTCP, etc.
there's quite a few things you need in order to get on the internet with System 7.
also, someone once told me sticking a hard drive in a bag that's had the air sucked out of it, into a feeezer overnight and then immediately dropped into the machine may yield some sort of result. but try at your own risk, because it seems like one of those snake-oil hard drive methods that has varying success. it may be possible to grab stuff off the 'dead' drive with a 7.5 install on the new 2GB drive (assuming you do *just* a 7.5 disk tools copyover) once you do that... there's other methods though.