Is she flirting with me? What should I do...?

I think she is flirting with you, even shy sweet girls do know how to flirt. When she said 'He's cute' I think she did mean you as we tend to focus on a guy nearby and talk about him. Maybe if you do ever see her alone ask her out, that seems quite safe and even if she says no you will not make a fool out of yourself. Trust me she would take it as a compliment.