Paul,
Is this a Mybook "Studio?" Hmmm, I wasn't aware that these came pre-formatted as case-sensitive. Then again, I wouldn't expect them to be journaled, either. Just goes to show how much I know 😉
For use with Time Machine, a volume must be formatted as "Mac OS Extended (journaled)."
It should never be case-sensitive. Notice that I say "volume." The drive, itself, needs to be using the "GUID" partition scheme for an Intel Mac, and the "APM" partition scheme for a PPC Mac.
Probably, you'll need to format (or partition) the drive. My guess would be that it is using either the "APM" scheme, or worse, the Windows-centric "MBR" scheme (which would render it completely useless for Time Machine). At the very least, you'll need to format the volume to get rid of the case-sensitivity.
In other words, it would be prudent to copy the data off of the drive. That said, the software you will find "pre-loaded" on the drive is pretty useless in Leopard, IMO.
Scott