I am trying to create a software like Ibackup.com. However, I am not sure how to make the software so that it'll map as a local Harddrive. And i am not sure where to start researching on this. Someone please give me some pointers.
4 Answers
I can point you to Dokan ( a user filesystem for windows like FUSE on linux), You install the driver then write the appropriate software for replying on IO request.
On a more complex answer you have to work with the NT DDK to write a driver that would be your software for being a filesystem (look at IFS: installable file system ), note that it is very complicated to work with (mainly because a crash of your software mean a BSOD ), and you would probably like some more higher level software like Dokan that would help you in that regard.

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Take a look at the Subst command. I suggest you invoke it externally instead of simulating what it does, simply because of all the things that can go wrong.
(Side note: The correct term is a volume, not a drive.)

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Just as a reference: virtual drives can be created using our Callback File System product, which is a supported, documented and maintained solution.

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Yes, but they are WAY too expensive. $2500 for their license @.@ – Erwin Yu Jan 26 '11 at 07:57
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@Erwin well, you can have the bugs for free of course. But your existing competitors (those who were unlucky to choose free bugs) are migrating to CBFS now. – Eugene Mayevski 'Callback Jan 26 '11 at 08:27