Although currently (August, 1991) MacTCP is not fully compatible with
System 7, you actually can use MacTCP -- if you put it in the right place.
Take MacTCP out of your Extension folder and put it into the System folder
itself. Since you are making your connection via LocalTalk, and since you
cannot be running VM, you should be able to make a connection.
This is a workaround, but it should give you the same functionality you
used to have until full compatibility with System 7 is available.