Definitely find out what kind of video card is in the system, because several things sound like they're just plain wrong.
Out of curiosity, what *specific* Studio Display are you using? Apple slapped the same name on a bunch of different monitors. Is it an ADC version or does it have a DVI (or VGA?) plug. The presence of ADC would at least imply a stock Apple video card, which would make the inability to adjust the resolution or color depth more difficult to explain. I'm also wondering what is the deal with the "phantom" second display.
Did you install the OS on the system or are you using whatever the previous owner had on there? I'm wondering if you might have a corrupt/broken OS 9 install. One perfect way to get one on an OS 9 bootable machine is to clone the boot partition of a newer (and, especially, non-OS-9-native-boot-capable) machine that doesn't have a "real" OS 9 install and instead just has a "Classic Support" System folder installed on it. I know from experience you can boot the neutered "Classic Support" folder that shipped on things like Aluminum G4 Powerbooks on 9-capable machine but a bunch of things are broken in subtle ways, including video drivers.