Hello Afflictionz and welcome to Seven Forums. My usual disclaimer: I'm not an expert at anything.
If I'm understanding your situation:
I've had this pc for about 2 years so I've never created a system image for it, I've got a small external harddrive with 60gb left on it (includes my laptop system Image in a separate folder)
So we're talking about two different PCs - a laptop that already has a system image created and stored on the external hard drive, and a second computer that you're trying to image to the same
external hard drive. And this external hard drive has 60GB of free space left on it.
My pc 1st harddrive containing all the files needed for the system image has about 1.4tb of information stored on it
When you say "1st harddrive", is this hard drive labeled the C: drive or perhaps the C: partition? And does it contain the Windows 7 operating system as well as other data, programs, etc? If so, and if you're using the native (built-in) Windows 7 imaging tool, it will want to image that entire C: drive / C: partition. You'd need to move pretty much the entire 1.4TB of information to either a different hard drive or create a different partition on that "1st harddrive" and put your information on that newly created partition. Then you should be able to select just the C: drive / C: partition for imaging.
the system image on its own should be under 25gb?
There's no guarantee how large the system image will be. It depends on how much data is being imaged and how much compression the imaging tool provides. On my computer I use the Windows 7 imaging tool and the free Macrium that Pauly suggested. They both provide about a 50% compression rate.
If you could post a screenshot of your disk management it will provide a better understanding of how your hard drive(s) are set up and what your options are. How To Access Disk Management in Windows 7 Screenshots and Files - Upload and Post in Seven Forums