1. What version of Linux
2. Are all your hard drives formated to NTFS (the default XP/Vista drive format)?
Most bootable linux system use a combination of RAM and the local media be that CD or Pen drive. Some systems will seek out free disc space to make a Swap file and others will load totally into RAM.
Once booted you can 'mount' a HDD, think of this as assigning a drive letter so you can see a drive, this then allows you to use the HDD to read / write files although it is perfectly possible to use free space on the pen drive you have. Some older distributions have problems with NTFS formatted drives although many newer ones cope fine.
Let us know what you are using and I'm sure we can give you a good explanation.
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