After much trial and tribulation today I've finally cracked how to return a non zero exit code from a call to osql back to a dos batch file.
The answer is as follows. Note the bits in bold below are most important, and the use of the single & sign to denote running the IF ERRORLEVEL 1 command even if the previous osql command errors.
for /F %%i in ('dir *.sql /b') do osql -b -E -S MyServer\InstanceName -d MyDatabase -i %%i & IF ERRORLEVEL 1 goto ABORTBATCH
:ABORTBATCH
popd
@echo on
REM Specify non zero exit code to signal error occurred
exit /b 1