Disk Utility can't perform all its repair functions on an active startup disk. So, your problem may be resolvable if you could indeed boot from your scratched instal disk.
As it's no good, the best option is to find another one... Or find another Mac that you can use to connect to your eMac. (IE use a firewire cable, put the eMac into TARGET DISK MODE, and run Disk Utility that way).
You MAY have bad caps, a problem that some eMacs experienced leading to the computer freezing hard (ie you have to hold the power button for 10 seconds to shut the computer down, no other way to unfreeze), but as you've presumably not had any other freezing problems til now, and Disk Utility thinks there's a problem with your hard drive, I'd look at that issue first.
Message was edited by: cosmichobo