A collection of limitations (both hardware and software) currently prevent Windows from booting and running off a USB drive. Some of them are described in this whitepaper from WinHEC 2003. Another reason not mentioned in this paper is that during any hot-plug operation, the USB bus is completely reinitialized. Windows really doesn't like it when it loses access to its boot device. Imagine, you plug in a USB camera, the USB bus reinitializes, Windows loses access to the boot drive, and *oops* the kernel needs to page in some data and it can't.

Rats.

But who knows, someday maybe it will work.