In Virtualbox you have to make virtual hard disks. Make one on the USB drive and tell Virtualbox to install to the virtual hard drive you have just created.
EDIT: To answer some further questions:
In the new Virtual Disk dialog, next to the location field is a button. Click on that button. In order to get to the virtual disk onto the flash drive, next to Save In in the file select window is a drop down box, click on the arrow and you can get to your flash drive from there. I recommend setting the image to dynamically allocate, since the size of your flash drive isn't the available disk space. Name the image, then select that image to install Ubuntu to in VirtualBox. VirtualBox will never install directly to a drive, but will always install to a virtual disk. Windows will still be able to read your USB drive, but there will be a file on there ending in .vdi, that is your virtual disk drive.