Wubi runs outside of Windows. The installer uses the Windows file
system to create the file(s), but then it mounts it as a device when you re-boot
and it has the same effect as booting on another drive. Once it boots, you are
in Ubuntu. This is similar (but not the same) as using a virtualization. The
difference is that virtual machines need the host file system to run on. Wubi
does not need the host OS to run on since there is no program such as VirtualBox
or VMware. Instead, it relies on mounting the file as a loopback device. What
Windows does is setup the the file and supply the space initially. The rest is
up to Wubi and Ubuntu.

What remains to be seen is if the container can be contaminated by virii, etc.
from when you are in Windows. You can delete the file from inside Windows, and
as everybody knows Windows security is not the best, so I would be careful not
to rely on it for anything too important. Also in Windows you can corrupt the
file system if the system crashes and this has been known to happen.