I've never tried 1.1, but the "Exception in device driver: A:" line makes me wonder if maybe there is a problem with the floppy disk driver not working under the emulated floppy drive.
Let's think back in time... Version 1.1 was released back in about 1987 or 1988. The common floppy disk formats back then were:
-5 1/4" 360 K double-sided, double density floppy
-5 1/4" high density (1 MB) floppy
-3 1/2" 730 K (I think that's about right) floppy
-3 1/2" 1.44 MB high density floppy
Is it possible that the OS/2 floppy driver is maybe expecting one of these other formats, and trapping when it finds something it isn't expecting? Maybe try switching the virtual A: drive to one of the other formats which was in use back them. Or it is possible it may just not run under virtualization... I do recall reading somewhere that in the 1.x versions of OS/2 there were several direct hooks the OS made into the processor which were done to overcome some problems they ran into with the 286 processor having trouble switching from real mode to protected mode, back to real mode again... If these aspects were not duplicated in the virtual machine, it may be a situation where the 1.x line will never run under virtual technology.
Just a thought, I don't know if it'll help or not.