Directly after successfully installing test release #3 (fd11tst3.iso) in Virtual PC 2007, I ran: find "LH" autoexec.bat
Results are presented OK, but additionally "Error reading drive A: in DOS area: Device not ready" (translated from German) is displayed.
Not sure, but this might be a bug in the older kernel. FreeDOS 1.2 RC1 uses an updated version.
Can you confirm if this still persists in FreeDOS 1.2 RC1? (I cannot reproduce now.)