Looking at that one picture, it seems the bike has Shimano RSX components. In 1998 the RSX group was a lower end group two levels below 105 and still 7 speed. The crankset looks like the A413 triple (w/ 26/36/46 gears!) and the RD, FD, and brifters match the Shimano A410 drawings I've downloaded from the 'net.
If the bike's previous owner installed a reasonably complete RSX group, I'd expect it to have a proper Shimano 7-speed freehub too.
In the last year I've faced a similar challenge of figuring out how to upgrade two older bikes: I decided to leave my 1994 MTB as a 7 speed and deal with the hassle of a mix and match setup.
As for the 1985 Tiawanese Schwinn that I'm slowly building up for indoor trainer duty, it's getting all new current generation parts. I had several options for dealing with the 126mm rear spacing:
1) Build the bike with an old 7 speed group.
2) Cold set it to 130mm as described by Sheldon Brown.
3) Load a 7 speed hub with 8 cogs from a 9 speed cassette and use the RD limit screws to keep a 9 speed shifter out of the last gear. I think this idea is also from Sheldon's site.
4) Narrow a 9 speed hub to 126mm.
I chose to narrow a new 9 speed hub. Normally, that would result in extreme wheel dishing. However, I was already going to be building a custom wheel, so it wasn't a problem to use an offset drilled Velocity Aerohead OC rim.
If you want to upgrade to 8, 9 or 10 speeds, but don't want to cold set your Terry, you could do the same thing. I checked and the Aerohead does come in a 24 inch version for a matching front wheel!
I don't know if either of my choices was correct. The Schwinn isn't finished yet. And I'm about to change the MTB's cranks a second time - from new ones to higher quality and better looking 1994 vintage used cranks.
Good luck with your new old Terry!





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