You can use a PATA drive over 8GB (up to 128GB will be fully recognized). However, during startup (when the IDE controller is in charge), only the first 8GB of disk space is recognized. That is why you need to partition the drive so that the first partition fits within the first 8GB of disk space, and install the system there. Windows PCs of the same timeframe had the same limitation with the IDE controller. Once the OS takes over control, then the rest of the space is accessible. If you are partitioning the drive, use something like 7.6GB for that first partition.
The hard drive and optical drive are on separate IDE buses, so the jumpers on the hard drive need to be set to Master (single drive), or just Master if there is only one Master setting.
But good lord, are Macs always this hard to fix?
iMacs use custom designed parts (except for RAM and hard drive). So yes, you can't go to Best Buy and buy generic parts. Since they are over 10 years old, you aren't going to find new replacement parts either. And it is an all-in-one computer, so it is obviously more difficult to work on compared to a plastic beige box. However, the tray-loader iMac has the pull-out chassis (which is essential the computer), so as long as you don't try to get into the CRT portion, it's not so bad.
You should think of it as two parts. That pull-out chassis is like the beige box, and you can take it apart with a screwdriver. The rest of the iMac is like the PC's CRT display; you generally don't want to mess with that portion.
You should find a retail Mac OS 9 disc. You can update any Mac OS 9 installation to 9.2.2 with free downloadable updaters. It should be a
retail disc, not a disc that came with another Mac model. The retail disc is white with a big orange 9, and make sure it a +full installation+ (not
update ) disc. With Mac OS 9, it's still old, but you'll find some interesting software, because Mac OS 9 was around for a long time. Also, Mac OS 9 will run fine, even of the iMac only has 64mb of RAM, and it will run in "snappy" fashion.