Are you trying to put the external drive with the image file on into your sky box (using "XTV Backup Image" as the destination)? That will not work as the image creation feature is there to allow you to back up your sky hard disk to your PC. Instead of selecting "XTV Backup Image" in the destination drive dropdown, you will need to select the target hard drive (like in the picture below:)
Note that for it to be listed the destination drive must be initialised and contain NO partitions (it should not show a drive letter in windows explorer).
Follow the following procedure to delete any partitions on the destination drive (make sure you select the correct drive though!):
1. Open Computer Management (Start -> Right click 'Computer' -> Select 'Manage')
2. Select 'Disk Management' in the left pane (under storage)
3. You should see a list of all your connected disks in the bottom pane, next to your new hard drive you should see a block labelled "Unallocated" (as in the picture below):
If this instead shows a partition, it must first be deleted. You can do this by right clicking on the partition and selecting "Delete Volume", note that this will delete any data contained on the partition (Make sure you select the correct drive!)
When you copy in this way, Copy+ will do all the formatting to the correct file system (a modified version of FAT32). You should not format the disk in any other application as this will not be compatible with Sky+.