I want to set up an Ubuntu VM in my machine, but downloading the ISO is too much. I do have a Live USB containing Ubuntu. How can I install it?
Well, without knowing what flavour of VM software you use, its a bit difficult to say. Both Vmware player and virtualbox don't support it out of the box however. It should be pretty easy to get around - you'd need to grab a bootloader that would bootstrap booting off the USB key.
Plop bootmanager should do the trick - its a bootloader you can download as an ISO, is small, and supports booting off various media even if they system its on doesn't directly.