I just reread your initial post. Apparently, menu.lst is located in a folder that is not part of the image file. So you should be able to edit to contents of the file if you boot off the Knoppix cd instead off the image file.

And, yes, you can store your data in any directory on your computer's hard drive or on any removable drive unless the file system of the drive is NTFS. File systems with write support are - among others - FAT32, FAT16, ext2, ext3 and reiserfs. Before you can write to the drive you have to tell Knoppix to mount the drive. In this regard, a persistent home directory is more convenient because it is mounted automatically when Knoppix starts.

Unionfs is not required if you only want to store user data to permanent folder on a hard drive or a removable drive. However, you cannot add new programs to Knoppix without using unionfs.