UPDATE: For versions of ERD Commander that come with MS DaRT use "Windows 7 USB/DVD Download Tool"
Here's the best resource I've found:
http://forum.xatrix.org/viewtopic.php?f=26&p=9323, however it didn't work for me.
After some tests I found the problem - since I'm using a 4GB USB drive, I had to check the 'LBA' checkbox in the PE2USB application.
Summary:
1. Download PE2USB
2. Download ERD Commander 2005 & extract the files from the ISO (I use 7zip).
3. Create the USB bootable system using PE2USB:
*** Select destination drive
*** Check 'Enable Disk Format'
*** Set 'Disk Label' to 'CD'
*** Check 'Enable LBA' for USB drives larger than ? (I think 1G).
*** Check 'Enable File Copy' and select the source folder (of the ERD Commander files).
*** Click start
Note: If you get "No USB disks found" on Windows Vista/7, run PE2USB as Administrator (right click -> Run as Administrator).
