-Will I be able to access and use the data on both hard drives no matter which operating system I'm using.
Yes, assuming that you are only using Vista or XP (i.e. not an OS like linux or Win9x that can't read NTFS partitions).
-Can I make a couple of directories common, for example my documents etc. Maybe even have duplicate directories that both have a copy of each document in it (essentially an automatic document back up system.)
Whatever you want - the contents of both disks will be available to whichever OS you have booted into.
-If I install software in one system, will I be able to access it with the other system? For example Word is installed on the XP drive, if I operate the system in Vista would Word work or would I need to do two installs?
No - you would need to install applications on both OSes. DATA is accessible to either, APPLICATIONS are specific to OS.
-Is there software out there that allows seamless operation where I can do the above?
If you are referring to applications, then no.
-Is all I'm essentially doing is creating two PC's using the same hardware but are essentially two seperate entities?
One PC, two mutually exclusive OSes. You can't ever run them at the same time in a dual-boot config.
You can install a Virtual Machine (VM) - e.g. WMWare or MS equivalent. Then you can install a "guest OS" that runs simultaneously with the host OS. You can switch / toggle between them, or even use remote control software to control one from the other...
SD