Is there something special I must do to get the floppy to recognize or format as 1.76 Meg disks?
There's a jumper on the motherboard labelled "disable df1". There are times you need to set that enabled, even if you have a DF1, though. Seems like it there was a strange exception when you have one high-density drive and one low-density one.... perhaps try changing that jumper?
Other than that, the drive should automatically recognize High Density floppies.