Creating a VHD in windows 7 is as simple as watching this tutorial. This tutorial will show you step by step how to create a Virtual hard drive in windows 7. After making your VHD the tutorial will guide you through a setup on how to create a schedule to automatically backup your selected files to the VHD, or simply the recommended files by windows. A Virtual hard drive is a partition of a current drive that is created to act like a new hard drive. For example, you have a 320 GB hard drive in your computer. You want a designated drive only for backups, instead of buying a brand new hard drive you create a virtual hard drive to do exactly this. If you wanted to make a 100GB Backup drive this will take away from your 320 making it only have 220 available.

http://www.youtube.com/watch?v=xAIiOJpdyiI