Blinking ? Folder at startup--PLEASE HELP!

I have a G3 iMac (500Mhz, 64M memory) that I purchased from our school when they went to all PC's. I believe that it came out in last 2001.
Mine is working fine, but I'm trying to fix another teacher's. Her computer won't start up. All I get is the blinking question mark and folder.
I replaced the battery. No luck.
I've reset PRAM. No luck.
I purchase the original system CD's off the internet and I CAN get it to book from the Software Install CD.
I've reblessed the system folder (even though it appeared to already be blessed) and hoped that would fix the issue. No such luck. I have the CD's that I COULD reinstall the system with. But I'd like to be able to save the programs and data first. Many of the programs are educational ones (from the school) that I don't have install discs for.
I can't even try to burn the applications folder to CD's (assuming that this computer will write to CD), because I can only get it to boot with the system CD, so the CD drive is always occupied.
Any suggestions on getting this to boot from the internal system folder without having to do a clean install? Or a way of "rescuing" my current programs/data?
I don't currently have it hooked up to the internet (working on it in my living room), but I could if I had to. I guess I could figure out a way to daisy chain it to MY iMac and somehow copy over the necessary files (to the working computer) and then move them back afterwards. Is this possible? What cables would I need and would it even work?
I also have a G4 Powerbook if there's anything that I can do from there. I'm hesitant to hook it to my new computer, because I once made the mistake of plugging my flashdrive into my OS 9.2 iMac and it populated it with tons of Finder files.

"Blinking folder icons at start up are always an indication of a hard disk problem."
Not always. See the following Knowledge Base Article:
http://docs.info.apple.com/article.html?artnum=31355 Mac OS: Flashing Globe When Computer Turns On or A folder that has an alternating flashing question mark

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