When you mount an ISO image as a virtual disk, this happens at the OS level. Not at the hardware level. When your running operating system stops, the virtual device goes away. So no, it is not possible to boot a physical machine from a virtual drive.
Whether or not you need to create physical installation media depends on how you want to install Ubuntu:
If you want Ubuntu installed separately from Windows--either alongside it or replacing it--then you need to create real physical installation media. You can burn the ISO image to a DVD (or to a CD, if you're installing Ubuntu 12.04 or earlier). Or you can write it to a USB flash drive.
If you want to install Ubuntu inside Windows with Wubi (so that it is contained within the pre-existing Windows partition and booted using the Windows boot loader), then you do not need to create physical installation media:
- If you have mounted the ISO image as a virtual disk, just run
wubi.exe on the virtual disk. This will install a Wubi Ubuntu system.
- Alternatively, just put
wubi.exe (you can download it here) in the same folder as the ISO image, preferably with no other files. Make sure you use the right version of
wubi.exe--it must be for the same version of Ubuntu as the ISO image itself. Then just run
wubi.exe, and it will automatically detect and use the contents of the ISO image.
If you are doing one of these things and it is not working, then: