Yeah, be aware you're not supposed to use both types of drives to write to a floppy. HD heads write half width tracks with higher current, so the tracks can't be read or overwritten by DD entirely reliably.

And I guess what formats a BIOS/FDC/OS allows can totally be as random as that.

2M-XBIOS is just a program that is present in a combination of multiple programs under the name of just "2M". Originally, it allows you to put more data on floppy disk than they do normally (for example : 1.8MB on a 1.44MB floppy disk without compression, 700/800K on a 360K 5"1/4 floppy disk, etc ...). It also comes with its documentation that explains how to use it, etc. So just look for "2M" on goolge, you should be able to find it. Then just take out 2M-XBIOS out of here, look at the documentation on how to use it (iirc, you need to load it with config.sys) and then you'll be able to use 3.5" disks at their full size without issues 😉 (But since that's a program you need to load after booting up, you won't be able to boot on 1.44MB formated floppy disks)

DRIVPARM in your config.sys will resolve this issue.

DRIVPARM= /D:(number) [/C] [/F:(form factor)] [/H:(number)] [/I] [/N]
[/S:(number)] [/T:(tracks)]

Purpose: Used in the CONFIG.SYS file to set parameters for a disk drive.

Discussion

Used for special configurations related to disk drives. For more information on the DRIVPARM command, refer to Chapter 6, Tips for Advanced Users.

Options

/D:num - Specifies the physical drive number (0 to 255, where drive A=0, drive B=1, etc.)
/C - Speeds up access to the floppy drive by signally to DOS that the media in a drive may have been changed.
/F:type - Specifies the type of drive being accessed. The following types can be specified:

0 Double-density 360K, 5 1/4-inch floppy disk drives (includes 160K, 180K, 320K and 350K formatted media size.
1 High-density, 1.2M, 5 1/4-inch floppy disk drives.
2 Double-density, 720K, 3 1/2-inch floppy disk drives.
5 Hard disk drives.
6 Tape drives.
7 High-density, 1.44M, 3 1/2-inch floppy disk drives.
8 Read-write optical disk drives.
9 Super-high-density, 2.88M, 3 1/2-inch floppy disk drives.

NOTE:

With DOS Version 6, type 3 (single-density 8-inch floppy disk drives) and type 4 (double-density 8-inch floppy disk drives) are no longer supported.
/H:heads Specifies the number (1 to 99) of read/write heads on the disk drive.

/I Tells DOS that a 3 1/2-inch disk drive, not supported by the ROM BIOS, is attached to a standard floppy disk drive controller.

/N Tells DOS that the drive uses nonremovable media.

/S:sectors Specifies the number (1 to 99) of sectors per track for the drive`s media.

/T:tracks Specifies the number of tracks per side for the drive`s media.

Did you check the BIOS settings? I hope the following will help you.
I was running win98 on a Fujitsu Siemens scaleo400 pentium 4 and I couldn't format 720k disks or taped-over 1.44mb disks that I wanted to prepare for my atari st.
Turns out that I have to manually change the drive type in the BIOS menu to 720k if I want to use 720k disks in the OS.