Okay, you'll want to see what Disk Utility has to say about that drive (verify the disk; the permissions thing is unlikely to help in this case but it also doesn't hurt to check). If no errors are found, you'll want to peek at the ownership of the System Folder etc. to see if they are strange ("no access" icons etc.)
Classic problems can be less than fun to find, because problems that get in the way of Classic running often aren't important to OS 9 itself (a real older Mac can often boot from such "broken" system folders just fine). It may end up being easiest to rename that system folder safely out of the way, then reinstall the OS 9 stuff from your restore CD or DVD.