I found what causes this bug.
It's the missing 7z.dll in the windows build.
A workaround is to install 7zip manually. If you have 7zip installed, 
usb-creator recognises the iso files.
The moment you uninstall 7zip, usb-creator stops working.

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https://bugs.launchpad.net/bugs/527972

Title:
  [Lucid Alpha 3] usb-creator.exe does not accept ISO selection on
  Windows XP system

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