REPRODUCING MY STEPS: THE SOLUTION (hopefully)
I'm happy to report that I reproduced the steps that led to the MODIFIED 2.0/4.1 System. While there may be other solutions, this is mine:
I did indeed start with a clean copy of System 1.1/Finder 1.1g (I don't know if this is necessary, but it's what I did).
Then I used System 2.0/Finder 4.1 Update disk and the included installer to update my 1.1/1.1g. It may well be possible to simply start with this system and continue from this point. However, I have not tested it and am going to leave it to someone else for the time being. It is interesting to note that while this system has a Chose Printer DA that features buttons to turn AppleTalk on and off the option is grayed out following the update.
This next step I think is the KEY: I used the Printer Installation disk (v1.1) which came with the System 3.2/Finder 5.3 update (also known as System Installation v1.0). Using the installer I performed a custom install of just the AppleTalk Image Writer (v2.3). You must use the installer as the System must be modified to use AppleTalk. Dragging an AT Image Writer INIT to the System Folder won't do it.
Lastly I copied v1.1 of the HD20 INIT to the system folder and that's it.
I made two separate disks from the ground up and both started up as described in my initial post and were able to initialize MFS 800K disks as before.
Now that I know the exact procedure and can reproduce it, I would love to hear others are able to do the same. The great thing about this, is that it truly is not a hack. It's simply updating an older system with a newer version of a printer driver. Somehow installing the AT Image Writer alone results in a partial update to System 3.2 without changing the version number resource, but it puts the version number 3.2 in the Comments box. The SysVersion application still shows 2.0. Apple probably never intended for this to happen and I'm not sure I would run a system like this, but it seems to make stable 800K MFS disks.
One important note in trying to test formatting between HFS, MFS, 400K & 800K environments ... and I have read this before ... once you format a disk as 800K, never go back to 400K. The same seems to be true for HFS & MFS. Don't try to go back and forth with the same disk. Once you format a disk as 800K MFS, leave it that way, don't try to reformat it to 400K or even HFS. And definitely don't format an 800K HFS disk and try to reformat to anything else. As a result of sorting all this out, I've got some pretty messed up disks (some even ended up with 1440K somehow)!
My fingers are crossed that this is the final solution. I look forward to other's findings ...
I'm happy to report that I reproduced the steps that led to the MODIFIED 2.0/4.1 System. While there may be other solutions, this is mine:
I did indeed start with a clean copy of System 1.1/Finder 1.1g (I don't know if this is necessary, but it's what I did).
Then I used System 2.0/Finder 4.1 Update disk and the included installer to update my 1.1/1.1g. It may well be possible to simply start with this system and continue from this point. However, I have not tested it and am going to leave it to someone else for the time being. It is interesting to note that while this system has a Chose Printer DA that features buttons to turn AppleTalk on and off the option is grayed out following the update.
This next step I think is the KEY: I used the Printer Installation disk (v1.1) which came with the System 3.2/Finder 5.3 update (also known as System Installation v1.0). Using the installer I performed a custom install of just the AppleTalk Image Writer (v2.3). You must use the installer as the System must be modified to use AppleTalk. Dragging an AT Image Writer INIT to the System Folder won't do it.
Lastly I copied v1.1 of the HD20 INIT to the system folder and that's it.
I made two separate disks from the ground up and both started up as described in my initial post and were able to initialize MFS 800K disks as before.
Now that I know the exact procedure and can reproduce it, I would love to hear others are able to do the same. The great thing about this, is that it truly is not a hack. It's simply updating an older system with a newer version of a printer driver. Somehow installing the AT Image Writer alone results in a partial update to System 3.2 without changing the version number resource, but it puts the version number 3.2 in the Comments box. The SysVersion application still shows 2.0. Apple probably never intended for this to happen and I'm not sure I would run a system like this, but it seems to make stable 800K MFS disks.
One important note in trying to test formatting between HFS, MFS, 400K & 800K environments ... and I have read this before ... once you format a disk as 800K, never go back to 400K. The same seems to be true for HFS & MFS. Don't try to go back and forth with the same disk. Once you format a disk as 800K MFS, leave it that way, don't try to reformat it to 400K or even HFS. And definitely don't format an 800K HFS disk and try to reformat to anything else. As a result of sorting all this out, I've got some pretty messed up disks (some even ended up with 1440K somehow)!
My fingers are crossed that this is the final solution. I look forward to other's findings ...