For some odd reason I started actually looking indepth at the morph os site and others. I was amazed to read that I can run 68k software on it without UAE so long as it doesn't bang the Amiga hardware, am I taking this in right?
yes, system friendly software will usually run without problems.
1. Is there much of a difference in actual performace between the 1.25GHz andf 1.5GHz models when actually using Morph OS?
Probably not although like Piru said having 64MB of gfx ram may be handy.
2. What amount of RAM is recommended for it?
RAM is cheap. Fit 1GB if you can.
3. What Keyboard and mouse do I use? Is this just a standard USB 2 button mouse and standard keyboard or do I need to use the Mac items?
Most USB keyboards and mice will work.
4. Is there Joystick support for classic games? Again, what kinds are supported?
you can run classic games using EUAE. USB configuration allows you to emulate keyboard presses using USB joypad.
5. How good are the web browsers? Do they have Flash support for things like youtube?
OWB is quite good, I use it as main browser and very rarely need to go to the PC. Youtube and other web sites use html5 so you don't really need flash for it. On the other hand there's a flash plugin that integrates perfectly with the browser.