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I just ran through this once again and had absolutely no problems. When you set up your vm in VirtualBox, do not create a virtual disk. Instead, configure the settings for the vm to have access to your usb device. Mount the iso as the virtual CD-Rom and use the USB as target installation media. The virtualized session will treat the USB drive like /dev/sda and everything is seamless.
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I am not sure how to configure Virtual Box to access the USB device. Whatever I do, it simply doesn't detect it. I might have to to a little research on it probably on VirtualBox forums.
For now I am labelling this post as SOLVED, since the solution has been provided and most members back it too.
"Blind faith to authority is the greatest enemy of truth."
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