If you are currently running Win 7, and you open Computer does the drive show in the window?
If it does, can you go to properties and tools and check for errors?
But your post is a little confusing. If your problem is you get the error when you try to install, do you have both drives installed? Could you boot to the DVD normally? How large is the drive?
If you are trying to install Windows 7 to an external drive, I don't think it will do that.