If the Hard Drive was previously used in a PC it might have (somehow) changed something so Device Setup no longer recognizes it. Or something like that.

If you have a Mac OS X CD (the beige G3 officially supports up to 10.2) you could boot up from it in you beige G3 and use Disk Utility to format the Hard Drive to HFS+ with "Install Mac OS 9 Drivers" checked. Then boot the Mac OS 9.2 CD and see if the installer will use your Hard Drive now.

If you don't have a Mac OS X CD that will work with your beige G3, you could put the Hard Drive in a different Mac running Mac OS X and try to format it there, with "Install Mac OS 9 Drivers" checked.

Or, if you don't have a PPC Mac with Mac OS X, you could temporarily disconnect the CD drive, boot the beige G3 with the Hard Drive you want to format, and a Hard Drive with Mac OS 8/9, and follow this guide on how to modify Drive Setup to recognize your Western Digital 205AA.

I used the guide to get a Compaq 4GB SCSI drive to work in my PowerMac 6100. I recommend making a copy of Drive Setup to use when modifying. That way you have a backup of the original.

Hope this helps.