So Disk Copy cannot be used to create an image, only to make one? Fascinating. I thought 4.2 could do it.
You did not elaborate, but will 4.2 also create a disk from an image? I did not realize 6.3.3 would would make a 400K disk. Surprising. Not surprised the disks won't mount. I've read it was a bad idea to mount a 400K or 800K disk under System 7.6.1 or later, especially if it was a boot disk. I believe the mere act of trying to mount the disk will corrupt it.
How odd that Disk Copy must first write an image to disk before it will make an image from a disk. Surely that must be a bug?
Definitely worth investigating this PC Exchange problem, especially whether Disk Copy will work. As I recall, PC Exchange was an extension that could be disabled? Lot of trouble if you want to make disk copies.