.Neo, on 25 June 2012 - 14:26, said:
It's highly unlikely wrong permissions will cause your Mac to give out a "startup disk not found " error through the means of a flashing folder with question mark icon. If not impossible. Frequently that's a sign of the internal HDD going bad.
It couldn't do any more damage though.

While highly unlikely, I was having the same exact issue a few years back, and repairing the permissions did fix it. At least enough to the point I could grab my files and it died completely about a week later that is.
swissdude, on 25 June 2012 - 14:29, said:
Larry, I Tried that already - no luck

Well, as noted above, it was worth a shot at least.
My advice would be get all your files off if it, and get a new HDD.
If you can afford a new machine, then go for it, but at the very least a HDD is rather inexpensive, and it could wind up being fine minus the HDD. If you are hesitant about spending the money on an HDD and would rather put it towards a whole new comp, I say why not. There is a pretty vast difference in the components between now and then. I know, I pretty much have the same exact iMac as you do, mine may even be a bit older actually, and it definitely is showing its age. Not the fastest machine out there, even when performing as it should. So I pretty much now use it as a station to sync my iPad and iPhone and keep all my music and photos on. Have a Macbook Pro for my day to day stuff, and there is a big difference in performance, definitely. Good luck regardless.