Wubi is best for people who still want to use Windows as their
regular OS, but want to give Ubuntu a try, but are leery about setting up
partitions. It gives better performance the going with the Live CD and you can
add programs and save settings which you cannot easily do from a Live CD.

As with all convenient things there is a down side which you have correctly
pointed out.

One more nice feature of the 8.04 Live CD (besides adding wubi if you put the CD
in a Windows machine) is that it now says, “Try Ubuntu without any change to
your computer” on the grub menu instead of the more banal message of old to Run
or Install Ubuntu. This is sure to instill confidence in people who do not want
to try anything new for fear it will cause a mess that they can't fix.

It is sometimes the small things that make or break it for someone sitting on
the fence.

Finally, you bring up one of my pet subjects. When you install Ubuntu as a fresh
installation it is worthwhile to take one extra step and add a separate
partition for /home which keeps your data and settings separate and makes
re-installation a breeze. Not only can you re-install Ubuntu, but you can even
switch to another distro and not skip a beat.