First off with the external drive connected, boot from the Leopard install DVD, go to Utilities>Disk Utility and see if the external drive shows up. If so format Mac OS Extended (Journaled) and it will be right to use with your Mac.
If this does not work, try connecting to the PC and use the XP disc recovery and format in NTFS and then later connect to the Mac and reformat.
Here is a link describing this more fully:-
Mac OS X disk utility - resource busy error | Christoph Peter