Drafting, legal in the olympics?

Yes it is. The Olympics follow ITU (International Triathlon Union?) rules which are always draft legal. Personally, I think it is wrong, but that's the rules.

I had no idea....

What are the principle differences between UTI and USAT sanctioned events? The UTI bikes look like road bikes with clip on aero bars. Are there any other differences besides the drafting issues?

I am not sure about all the difference between UTI and USAT rules other than the drafting. I think the reason that you saw more of a road bike setup in the Olympics was due to the bike course. That was an extremely hilly course, thus negating the need to be in an aero position very extended period of times. However, some of the competitors (but not all, suprisingly) did use clip on areobars for the downhill and "flat" portions of the race.

I agree with tri-bruin...both because of the draft legal, and the multi lap, hilly course, road bikes become the choice as the race reaches 'criterium' style...I am not a big fan of the draft legal style of racing, as it detracts from the solo effort that separates tri, from many other sports...there is a an article floating around about victor plata, and his gang of prize money marauders, who have started the first 'triathlon team'. They enter draft legal races, race the bike like a TDF team, then split the prize money...he says it is the future of triathlon...unfortunately sounds more like the beginning of the end ...hopefully this will convince the ITU to abandon draft legal racing and put it back on the athletes to train all three disciplines hard, as opposed to stay close on the swim, conserve energy in the pack on the bike...blister the run because you haven't exerted yet...you know, the Simon Whitfield training plan...