Is it possible to install Windows 7 on an external hard drive?
The short answer is "Not officially."
No version of Microsoft's operating system up to Windows 7 is designed to be installed on drives that are attached to a system via USB or IEEE 1394 connections. Microsoft supports only configurations in which the system drive is attached via IDE, SCSI or SATA standard connections.
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FAQ: Windows 7 migrations
One commonly cited reason for wanting to install Windows 7 to a removable drive is to allow the Windows installation to be moved freely from one computer to another. There are two reasons why this isn't a good idea. One is technical, the other legal.
First, Windows detects and sets up certain classes of hardware that rarely change -- the motherboard and processor type, for instance -- during the first installation of the OS, but generally not afterwards. It's possible to force a redetection of such hardware via the Sysprep tool, but it's hardly practical to keep doing it.
In addition, Universal Serial Bus has traditionally been a much slower bus type than the others cited above, so any system running on a USB-attached drive would be at the mercy of the bus speed of the USB controller. Your mileage may vary enormously.
Second, the licensing of Windows is keyed to the full complement of hardware on which it's installed. Moving a given installation of Windows 7 from machine to machine will force a reactivation of the OS on the new hardware. One workaround is to simply not activate the copy of Windows in question, but that's not much of a long-term solution.
That said, it is possible to hack together a Windows 7 installation that runs from a USB-attached hard drive, if you are brave enough to try it and are not attempting to violate licensing agreements by doing so. (Here is an example tutorial for doing this, which for the most part automates the process.)
Windows 8, however, has a new feature available in its Enterprise edition named Windows To Go. With it, administrators can build an installation of Windows 8 on a USB drive. Licensing for such editions of Windows 8 is covered via Software Assurance.
This was first published in October 2012