Please note, I'm doing this all this via VMware not dual boot, and also not booting from the distro. I've looked all over but can't seem to find an answer to my questions below:

I seem to not understand about ISOs. If I run an ISO distro where does it (or does it) store any files locally? It seems to be that I'm acutally running and creating everything in memory, but this is not what I want to do. Can I run the distro via ISO but create output localy - my windows or C drive for instance? If so, how do I tell an ISO distro to mount something it doesn't see exists? Thanks

you have misunderstood what vmware does with a iso. it just makes your pc think that the iso is your cd/dvdrom.
the install wont happen as temporary, while creating a virtual machine you need to specify all the stuff before, like hdd, ram etc. and make sure you use the iso file as the cdrom. so when you power on the machine, the installation should start.