Shadow Copy was first introduced in Windows XP, but there it could only handle non-persistent backups; persistent backups were then created by NTBackup in BKF file format. This cumbersome method was abandoned for Windows Server 2003, when Shadow Copy gained the ability to store persistent backups (512 simultaneously per volume) which would remain accessible even across reboots.
Windows Vista made further use of Shadow Copy with the Backup and Restore Center, which replaced NTBackup. Unlike NTBackup, the Backup and Restore Center's full system backups are block-based, which is a lot more efficient. Full system backups can be incremental.
Starting with Vista, System Restore also started using Shadow Copy. You can then access individual files within the restore points created by System Restore using the Previous Versions tab in in a file's properties dialog. However, since you can only access backups within Restore Points which are made once a day (or when told to do so), Previous Versions doesn't store a copy of each file when it's changed.
Shadow Copy is one of those Windows features which makes me want to hit my head against a wall for three days because I just don't understand why Microsoft doesn't make more pervasive use of it throughout the operating system. It has had the technology for incremental per-file backups for ages - whether on local disks (not useful for backups but very useful for file versioning) or remote or USB disks - and yet, Microsoft has, so far, refused to make this more accessible.
It would seem like I can finally stop banging my head against the wall, since WinRumors is reporting that Microsoft is finally putting a usable graphical user interface on top of Shadow Copy, which Microsoft is calling History Vault. It allows you to easily pick a location for your Shadow Copies, and you can share that target within your HomeGroup.
What WinRumors doesn't make clear, sadly, is whether or not it is still dependent on fixed once-per-day restore points; i.e., if file versioning has become more useful by allowing individual versions of a file, created as said files changes, to exist regardless of the restore point schedule. This is crucial for me - a nice new interface is good to have, but if it doesn't solve the core limitations of what we currently have in Windows 7 than it doesn't really do anything to improve it besides making it prettier.
WinRumors is bringing this as some sort of new feature, and positions it as a copy of Time Machine - which makes no sense. Shadow Copy is a lot older than Time Machine, and I hope with all my heart that Microsoft doesn't put that insanely overdone and ridiculous Time Machine user interface on top of Shadow Copy.
Shadow Copy is also a little more advanced on a technical level; Time Machine is a pure back-up solution through and through and provides file versioning through the stored backups. These backups must be made on a second drive, which makes perfect sense since it is a backup solution. However, laptops have just one drive, and are carried around all the time without a second drive present. This means that the file versioning features of Time Machine - insanely useful - are mostly useless on many laptops, since Time Machine can't create backups (where these file versions are drawn from) on the same drive. Shadow Copy does allow this, and as such, its potential is a lot greater than time Machine.
In Lion, Apple will be implementing something similar to Shadow Copy, however, in that Lion will save versions of files as they change on the local drive. Forget all the iOS carry-overs in Lion - I'm most excited about autosave and file versioning in Lion. I'm hoping WinRumors' story means Windows 8 will use Shadow Copy to its fullest potential, bringing similar features in an accessible way to Windows users.