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From your answer; your problem is that the room name is not being sent to the method.
To answer your question directly; no, it has nothing to do with permissions or chmod. The problem is that a database search is searching on a blank searchstring... that blank searchstring is your problem. The string should be travelling from the form in which you select your room, travel through the xoopschat php files, and be sent into functions.php through the method parameters.
The upset in this transfer could be caused by three things:
1) Form data (select room form) is not being sent to your server (may be due to a firewall/Norton Internet Security; also could be browser settings)
2) You've edited the code somewhere (either template or PHP) in the xoopschat module and messed things up (that's ok, it happens, it just takes some TLC), or
3) Something else I don't know about (like PHP settings "Register_Globals" or something).
If possible; try to narrow down the culprits; after which the problem may be pursued further (and by people who know how to fix it).
Best of luck solving this problem;
Keith