Loading an OS onto an external HD

Okay guys, got a bit of a problem.
I've had my HP Pavilion for a little over a year and my HD has already decided to fail on me. (Go figure)

My question is:
I've been searching everywhere to figure out how to correctly load an OS (Win 7 Home Premium) onto my external HD and be able to boot from it. I know HOW to do it, but this HD is a bit picky.

My problem:
I go to load the OS when I see that it says, "Windows cannot be installed to Disk 2 Partition 1. (Show details)". Then when I click on it, I get this message:

"Windows cannot be installed to this disk. Setup does not support configuration of or installation to disks connected through a USB or IEEE 1394 port.

Windows cannot be installed to this disk. This computer's hardware may not support booting to this disk. Endure that the disk's controller is enabled in the computer's BIOS menu."

What I'm getting from it is that I just need to check the BIOS settings to turn the controller on, correct? Is there anything else that any of you would recommend? Any questions/comments would be awesome.

Thanks.