This tutorial is has been tested on an Arch Linux system. If you are not an Arch user, it should still work for your distro; the main difference is that you will need to use your distro’s package manager instead of pacman.
If you currently do not have this package installed, download it
pacman -S grub-bios
Install grub to your USB device MBR (replace sdX, with your device, eg: sda, sdb, … etc.)
grub-install --recheck /dev/sdX
Then generate your grub.cfg file with this command (You may or may not need to initially create the boot folder on your USB device).
grub-mkconfig -o /[path to your device]/boot/grub/grub.cfg
Download your favorite LiveCD ISO (eg: Ubuntu 12.04 LTS).
Extract the ISO to a folder (e.g. name it ubuntu (inside there should be boot, casper, dists, … etc.))
Copy the ubuntu folder to the root of your flash drive (do NOT put it inside the boot folder on the USB).
cp ubuntu /[path to your device]/ubuntu
Navigate to /[path to your device]/boot/grub to edit your grub.cfg with a text editor.
nano /[path to your device]/boot/grub/grub.cfg
Modify the grub.cfg file accordingly (for Ubuntu it should look exactly like this example; feel free to generate additional enteries manually.