So after discovering that my Registered MorphOS iBook G4 14" CD/DVD no longer functions and having to use my iBook G4 12" as a work-around , I finally was able to upgrade to Morphos 3.19, install the newer SDL and try-out Hatari 2.5.0.

Hatari 2.5.0 functions, I can now choose floppy images in any directory and they work.

Only thing not working is the GEMDOS harddisk emulation but I have a suspicion that is related to the underlying Hatari code not knowing how to deal with an MorpOS filesystem.

GEMDOS drive basically mimicks a harddrive_to_directory_on_your host_mapping, well that is the very non technical explanation.

Still need to test the ACSI Harddisk emulation.