Plenty of them. Do a search for Linux Live installations, you can find several that are made to be run off a bootable flash drive. I think there are even some XP builds that people put together that run off a flash drive.
No, these you boot off and run in it's own OS, you will have access to the file system where Windows it on, but you won't be running Windows and the booted OS at the same time.
What you need is a virtual machine, but that does not go on the flash drive. VMWare is one.