I was testing the DX10 engine for Deus Ex when I realized I could run the game without installing it. I know for a lot of old games with a 16bit wrapper the solution to get them running on Win7 is to copy the files over manually instead of installing. Based on this I tested some other older games and got several to work DRM free without installing them.

My question is, what are the downsides of this? Do the files in playable configuration make for a good permanent backup? If not, why not? Is there a chance the games could launch and play but have other issues down the road?

I'm just curious as it seems to be a good backup solution.

For your questions: Yes. And Yes, There are chances it could have issues

My coworkers and I are currently in a quite austere work environment and don't have our personal laptops, so we're running games like Starcraft, Unreal, and such off USB sticks because you don't have to install them that way. No problems thus far, though we haven't tried to port any saved games from the USB sticks to a proper installation.

I'm sure you know that your bus speed will be a heavy limiter if you do something like that; I wouldn't recommend it on USB1.0 or 1.1. If you don't intend to migrate those files from the no-install running setup to an installed running setup, then you'll be fine. If I were going to make backups of my media, though, I'd always prefer to backup the "original" files (ie off the disk or self-extractor) and make the changes manually each time I have to use my backups; that shouldn't be a common enough occurrence to significantly inconvenience you.

Are you able to update the games as well, or are you restricted to the version that's in the original CDs?

If what you say is true, I wonder why pirates bothered to make any no-CD cracks for those games at all. :)

Well, updating in such a situation takes a little bit of scripting usually, since most updates don't just patch the main executable and add some new files in existing directories (though it's nice when games are set up to do that). We're not playing the newest games, here, so we've got fairly well patched games already. But if you wanted to update a game that you hadn't properly installed, you could write up a few fairly simple find+replace scripts. It would take only a bit of time.

Pirates make no-CD cracks because those are (often) the simplest way to circumvent physical copy protection; the way you do that isn't quite the same as running a game without installing it.

These are DRM free games, or in the case of Deus Ex I am using a mod (the DX10 stuff) that removed the DRM.

Nothing wrong with removing DRM on as game you own.

Most of the time, if it works then it will be fine. The most likely delayed-onset problem that you are to encounter is from missing registry keys, so be sure to backup the HKLM\Software\(publisher)\(game) and HKCU\Software\(publisher)\(game) trees in a .reg file (and don't forget to ensure that any path strings point to where you put the game files when you restore the registry file). In most cases missing registry keys get regenerated when you play the game, but when you apply patches the key for the installation path needs to be there and correct.

Usually the only reason you need to go through an installer at all is to make sure that you have the appropriate D3DX file if the game uses DirectX and was made in 2005 or later.