BAsed on another tip I received I tried to umount and mount the virtual hd again:

Still NO JOY

root@0[UNIONFS]# umount /UNIONFS/dev/hda1
root@0[UNIONFS]# umount /UNIONFS/dev/hda1
umount: /UNIONFS/dev/hda1: not mounted
root@0[UNIONFS]# umount /mnt/hda1
umount: /mnt/hda1: not mounted
root@0[UNIONFS]# cd /
root@0[/]# mount /dev/hda1 /mnt/hda1

went back to konq to try to create a folder. BZZT!

root@0[/]# umount /mnt/hda1
umount: /mnt/hda1: not mounted
root@0[/]# mount -o rw,user,exec /dev/hda1 /mnt/hda1

went back to konq to try to create a folder. BZZT!

root@0[/]# umount /mnt/hda1
root@0[/]# mount -o rw,user,exec,dev /dev/hda1 /mnt/hda1

went back to konq to try to create a folder. BZZT!

root@0[/]#

This is getting really frustrating. URRRGH!

And holding me back from my next test project.