With the 12.04.1 release, Wubi.exe was also bumped to 12.04.1. For those that don't know, Wubi.exe is very particular about which version it will install: it first checks the ISO and rejects it if it doesn't match.
DEBUG Distro: wrong version: 12.04 != 12.04.1
So, why is this a problem? Simply that not all flavours of Ubuntu e.g. Lubuntu/Xubuntu/Mythbuntu get a 12.04.1 ISO released. And Wubi.exe is clever enough to know that - it still has the address for the 12.04 ISOs for these flavours and will happily download the entire thing... and then stupidly reject it.
So that all seems rather pointless and frustrating to the users. Especially since the same thing happened with 10.04.1 - someone might've figured out the pattern by now. But in their defence, it's taken me 10 minutes to write up this post, so you can see why it'd be so difficult to fix.
Actually a look at the code indicates that Wubi.exe for 12.04 will happily install a 12.04.1 ISO, just not the other way round. So if they had just left it at 12.04 and updated the link to the 12.04.1 ISOs then... no breakage.
An easy workaround is to use the 12.04 Wubi.exe for your favourite flavour (anything other than Ubuntu... except Kubuntu which has been broken for Wubi installs since 12.04 was released). So you can install Xubuntu, Lubuntu, Mythbuntu, Edubuntu in this manner. Here is a link to it: http://people.canonical.com/~evand/wubi/precise/wubi-r266-signed.exe
Probably to repay me for doing just 10 minutes of research, I've found out that Xubuntu, Mythbuntu, Edubuntu and Kubuntu all have a 12.04.1 release. So in fact, it's Wubi 12.04.1 that is at fault here for not updating the metalinks. It's only Lubuntu that's stuck on 12.04. Either way, none of these work without some manual workaround.
Workaround part 2
If you want Kubuntu, Mythbuntu, Edubuntu or Xubuntu, download the ISO first, save it in the same folder as the 12.04.1 Wubi.exe and run wubi from there (disconnect from the Internet prior to running).