This error occurs when trying to create a two-way replica to a geodatabase other than ArcSDE. When creating two-way replicas, the destination must be an ArcSDE geodatabase.
When creating a two-way replica, ensure the destination geodatabase is an ArcSDE geodatabase (personal, workgroup, or enterprise ArcSDE). If you do not want to replicate to an ArcSDE geodatabase, consider using one-way replication or checkout/check-in replication. For more information, see Replication types.