The output workspace is not able to contain a feature class representation. A feature class representation is only allowed in a geodatabase. All other workspace types are not valid. The geodatabase must be ArcGIS 9.2 or later.
Change the output to a workspace type that can have a feature class representation. A conversion tool can be used to create a valid workspace from an existing one, and a workspace tool can be used to create a new valid workspace type. If using a geodatabase, you must upgrade it.