Windows 7 prefers hard disk drives that use the NTFS file system, its integrated backup program cannot back up files from or to drives that use the older FAT32 file system. So, if you select a drive that uses FAT32 as the backup location, Windows 7 displays an error message. FAT32, a leftover from the days of Windows 98, works with both MacOS and Windows (which is why most external hard disks use this file system by default), but it lacks the features needed to fully support Windows 7 backup.
You can use the Convert.exe program to solve this problem. Open the Command Prompt by click on the Start button and typing in 'cmd' and typing the following command into it:
convert c: /fs:ntfs
Replace 'c:' with the correct drive letter if yours is different. Convert.exe will check your external hard disk for errors, verify there's enough space for conversion, and then convert your hard drive. While this theoretically will not destroy your data, you should back up all your files first.