Could this be cache related? If I recall these aftermarket upgrades would need third party extensions or drivers to utilise the L2 caches on the processor. Now if the system folder in question had an extension that accessed the processor or hardware on the processor daughtercard directly, this could work fine with the 450MHz stock processor but present anomalies with the 1.2GHz aftermarket processor.

Following so far? Awesome.

This would explain why a different system folder would run fine with the 1.2GHz card, also why Mac OS X would run fine on the same processor, but one OS 9 system folder wouldn't. It's extension related, it just so happens that in this scenario it doesn't like something that is present, or not present, on the upgraded CPU.

Best I could come up with off the top of my head anyway.