If you have plenty of space on both the destination drive and your system drive (OneCare needs to compress the backups on the local drive before transferring the data to the external drive), please contact support for help with this problem.
How to reach support (FAQ) - http://social.microsoft.com/Forums/en-US/onecareinstallandactivate/thread/30400b52-7f26-4ba0-bc18-17e305329d90
-steve
Microsoft MVP Windows Live / Windows Live OneCare, Live Mesh, & MS Security Essentials Forums Moderator