I have been using Damn Small Linux (DSL) which is a knoppix variant.
http://www.damnsmalllinux.org/
it is pretty amazing
My USB key is set up with a 50MB partition to boot DSL. the remainder is used for data. it can remember your settings.
writing to cd is fine as you can use the built-in tools or install any other software you want on top of it. cdrecord works fine for me.
i forgot to mention: easy install. just boot the dsl CDROM, right-click on the desktop, select Apps, tools, and there is an option there to set up your USB Key there as a bootable disk.