I bet its that switch that detects if the floppy is inserted, its near the opening, at the left. It is not detecting properly the disk has been removed. There are two switches:
-one for detecting disk present (on left)
-one for detecting HD disk present (on right)
check it with multimer and clean it with contact cleaner.
:-)
@lurkist: check the cable if it has the right twist, that might causing LED problem (especially pin 6 "in use 0")
