A few random thoughts on this...
If your iMac is still under warranty and/or AppleCare, I'd suggest calling them when you have about 2 hours to kill. They have iMac "specialists" who can help out in this case.
A few notes of observations/caution when talking with Apple:
* If your problem is software related, they will walk you through a number of diagnostics and other software stuff before even discussing the replacement of the drive. This will range on everything from repairing permissions (for all the good that it does), to booting with your system restore disks and running "Repair Disk" on your volume. In any case, they seem to have an arsenal of software things they'll run you through, which might clear up any problems you're having with Finder and thus correctly reading your disks.
* If your problem is indeed with the drive itself, depending on your iMac model, you might be eligible for the DIY repair program (which, IIRC, covers the first two iMac G5 models - thereafter the iMacs became non-user serviceable). IF you're eligible for the DIY program, then do it - you'll save a lot of aggrivation over taking it to an Apple store.
* If the tech on the phone determines that your drive needs replacement but your iMac is not eligible for the DIY program, then be sure to get a case number, ask that the person on the phone document everything you went through with them, ask if they can make sure it will show up under your system's S/N at an Apple store, and if you can, get them to pre-authorize a hardware exchange. Otherwise, you'll have to go through the whole process again at an Apple store "Genius Bar."
* If you wind up taking your iMac to a "Genius Bar", be prepared to do everything all over again that you've already done on the phone, kill another 2-3 hours, and be asked some relatively inane questions about your system. MAKE SURE YOUR VALUABLE DATA IS BACKED UP before going to an Apple Store. They may want to do all sorts of pointless things to your software, including a complete re-install. If the store determines that your drive needs replacement, be prepared to part with your system for anywhere from 2 days to three weeks.
* Finally, Apple or the Apple Store may insist that you use only Apple-branded CDs and DVDs with your drive for burning. Tell them this is a load of bollocks since Apple's stuff is more expensive than everyone else's and frankly as a consumer you should be able to read/burn just about any compatible media type from any brand you want.
Helpful phrases when dealing with Apple at all levels:
"I'm sorry, this is not an acceptible solution to my problem, can we go another route?"
"Can I please speak to someone who can help me achieve satisfactory results?"
"Can I please speak to your manager?"
The combo/superdrives that Apple ships with the Minis and iMacs are notorious for failure - keep going until either your software problem is resolved to your satisfaction or your hardware is replaced. Good luck - hopefully there will be an easy software fix you can do on your own without ever having to deal with Apple.
Tiger Cache Cleaner is a good resource for doing simple software maintenance, as is Onyx - also, if it is included with your AppleCare, use your version of TechTool Deluxe (though check Apple's site for a newer version) to run some diagnostics as well.