Hi
I have a 2001 iMac G3 EMC 1857 model number M5521 - it's developed this behaviour where it won't recognise any internal hard drive I connect - the drives are fine in other machines - I read somewhere that this machine won't recognise a drive above 8GB in capacity but I'm sure that's not right
Any help is appreciated

These will go over 8GB easily, I've got 40 and 60GB drives in both my G3s. I'd check around the IDE area of the board for any fuses that could potentially be blown.
I've actually had a very similar issue on two separate iBook Clamshell logic boards, both of which wouldn't spin up any hard drive I connected to them but otherwise worked fine. Never did figure that one out.

The 8GB limit is just where the OS lives. it has to be in the first 8GB of the hard drive. Which usually happens when you do a fresh install. The trick is, if you later update or something, the hard drive might decide to move the OS outside of that 8GB. which would cause the computer not to boot. So the work around was to create a 8GB partition in the front of the drive just for the OS.
@3lectr1c is exactly right. the iMacs should still be able to SEE the drive. and you will even be able to install an OS on them. So. if your imac can't see the hard drive. something else (not capacity related) is going on.
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i know this is true with the iMac's up to 1999. but i don't know when this was fixed. So your iMac may not even have this problem.