Error Message of disk not formatted when trying to upgrade to Lion

I am trying to upgrade to Lion and have received an error message stating "The disk in not formatted as Mac OS Extended (Journaled). Use disk utility to enable.

What exactly am I supposed to do in Disk Utility?

I opened it up and I wasn't sure if I am supposed to reformat? Repair? Partition? Am I supposed to be reformatting as an Extended Mac OS?

How exactly do I do that?

Basically has anyone encountered this and what steps are needed to continue from this point?