Because it's Virtual RAM, not real RAM. It's not a substitute
for the physical RAM, otherwise, you will find your PC not booting.
As for how it works, not entirely sure. Based on what I read, when
you plug in removable storage, Vista will prompt you whether you
want to use that as virtual RAM. If you click yes, it will be used
as virtual RAM. Vista will then prioritize activities to use this
virtual RAM, so it will not slow down the PC.
And it works with USB devices because most removable storage
devices are USB. It's not limited to just USB, any removable
storage will work.