Yes, all you need is the System Folder. Applications are not necessary, but obviously you'd probably want at least a few for the system to be useful.
The disc can be HFS or HFS+ formatted. If you're burning in Toast there's a checkbox somewhere that says "Make disc bootable". You will need to find and check this box. I remember using Toast 5 OS 8-9, but I don't remember exactly where the box is. "Disc options" or something like that, IIRC.