I'm going to take a guess that since you didn't mention otherwise, that you installed OS9 on the same volume as OSX.
Sorry, I forgot a few potentially important details in my first post. Namely that I have OS X Leopard (10.5.

on a separate drive (not just a partition, I have two drives in the Mac, one for X and one for 9). However you're correct in the assumption as I
used to have it all on the same volume, recently though I came across a spare HDD I had in storage and figured I'd see if it still worked, I put it in this Mac to test it, and after that I realised I might just as well leave it in there and boot OS 9 off it so I did.
* You have correctly determined that OS9 password security lives in the Multiple Users functions. In order to have the best chance of getting it all correct, you have to tolerate the OS9 Setup Assistant with its silly questions etc. If you do, you will find it creates your admin account in the Multiple Users Panel for you. There will be only one account there - you. Then, all you do is dbl-click your name and add a password.
I don't think I actually ever used the setup assistant. I mean, I might have done, I don't actually remember, been a looooong time since I installed OS 9. I do seem to recall I set up the mutliple users after I had it all up and running though, it might be I need to just start from scratch and reinstall OS 9 which will be a bit of a pain but may be my only solution if all else fails.
6) The very next time you boot OSX, immediately goto System Preferences/Spotlight/Privacy and add the entire OS9 volume to the places that Spotlight will NOT index.
6a) If it's OSX Leopard, THEN goto System Preferences/Time Machine/Options and EXCLUDE the OS9 volume from backup. Yes that means a separate backup solution for OS9 is necessary.
I recently discovered the issues surrounding OS 9 volumes ending up with "BTree" errors which cannot be fixed by disk first aid, largely as a result of me trying to find solutions to the unexpected quit issue I have. I followed some advice on this forum (by yourself I believe), to do this. First, in Leopard I added the volume to spotlights privacy list. I went to do the same with Time Machine but couldn't. I don't use it (and as such have it turned off) anyway but all the guides on adding a drive to the exclusion list say to "Open Time Machine preferences and click the options button", but there is no options button. My Time Machine preferences just looks like this:

Anyway I figured since I have it switched off anyway that'll probably do the trick. So with that done I backed up my OS 9 install to a temp usb drive, booted my OS 9 retail disc (9.2.1), used it's disk setup utility to wipe the disc I wanted OS 9 on, then checked it with disk first aid. Was nice and clean, no errors. So I booted back into OS X and found that spotlight had conveniently removed the exception for that disk, so I readded it. I then moved my OS 9 install back to the drive, restarted the mac into OS 9. Of course the unexpected quit still occurred, but when I ran disk first aid to see if the drive was still clean I got two mismatch errors and the Btree error had come back! I also noticed on the drive a folder for spotlight called .spotlight-v100 or something very similar. It had a file inside called exclusions or something.
It seems spotlight puts that folder on the drive even if you add an exemption, as that's what it uses to know the drives excempt, I don't know if time machine also does anything even though it's turned off... Having said that though, I expect I've had this BTree error existing the whole time I've used OS 9 with OS X and even before I put it on it's own drive and I've not had noticeable problems with it (just the unexpected quit with login) so it might just be a red herring for me.
first thing to try is to assign some 5% more "minimum RAM" in the "get info" window to both the finder and the multiple user APPC
Sorry I should have given more detail to say I'd tried that, when I used resedit to increase login's memory I also did it with finder and the system (which is renamed classic on this install).
Talking of classic, it could well be the reason I have the issue. Pretty sure the disk image on the mac's restore disc was meant for the OS X classic environment, and although it can be booted, perhaps it's not meant to be? Only reason I used it and not say the retail disc of os 9 I have and then update that to 9.2.2 is supposedly the version os 9.2.2 on this macs restore discs is specifically tailored for use on this Mac and is more "up to date" than the original 9.2.2 update from 2001. Not sure where I read that, or if it's even actually true.
I must say at this point, I've never used the macs restore/software install discs to actually install os x (which I believe is 10.2 or os 9 onto this mac. I didn't buy the mac from new; I got it second hand about 11 years ago off ebay to replace a dead imac. Although I had the original discs I'd only just got leopard retail disc in the mail i intended to use with it so I just installed that. I was going to use my os 9 retail disk to install os 9 onto it too at that point but then I started looking into the restore discs and found out about the os 9.2.2 install located on that. The rest, as they say, is history. Knowing my luck this is probably the root of all my problems.
OK, so what I'm going to try and do now.
1. Boot into OS 9 retail disc.
2. Backup the os 9 install I have from inside the CD's desktop, if I can.
3. Wipe the os 9 drive again.
4. Restore the backup. This time I'll move the spotlight-v100 folder too so that spotlight keeps the exclusion in OS X and doesn't potentially screw the drive up again.
4a. Of course still not sure about time machine but it is switched off, so hopefully that is all it needs to be.
5. See if Btree errors persist
6. Turn off all multiple users settings, remove everything I can, then run setup assistant to set it all up again.
7. Failing any of that just reinstall OS 9 somehow or other. I'll see if the restore discs actually have an option to install it as a bootable OS.
8. Report back with my failings. Or successes but I'm not being optimistic about it.