I want it as time machine/server harddrive.
When I go through Time machine I get this. Then I click set up and it just opens Airport Utility. (I went through this already)
I assume it's formatted HFS+ already? I just took it out of the box and plugged it in.
Unless the box says it's formatted for Mac OS X, it's probably formatted NTFS. Open Disk Utility and format it using HFS+. Time Machine can only use HFS+ formatted volumes, including those shared through an Extreme.