I'm still worried about your earlier comment ... "yes, I am using cable select. Both HDs are set to master".
Both drives set to MASTER is bad. If the drives have a Cable Select option on the jumpers, then use it. Otherwise go back to Master (on the end connector) and Slave (on the middle connector). Unlike the earlier G3s your MDD can boot of Master or Slave drives.
When you partition and format, which option do you use for formatting ? Presuming its the default HFS Extended (for OSX 10.2 Install, HFS Extended Journaled for OSX 10.3 Install).
EDIT: Of course, unrealted to your issue, my MDD, that has been working perfectly for 8 years has started freezing this morning and won't reboot into the Finder. It's a headless MDD, accessed through Apple Remote Desktop (10-client v2, only £0.99 on eBay) and it doesn't show up on the Scanner list.
Of course I don't have a spare monitor to connect to it, I had 2 spare Studio Displays, but I sold them (after 4 years sitting in their boxes) on Sunday.
No disaster, Dungeon Siege runs fine on my G5.

