I've been running Oneiric on Wubi since early on in development, and it has worked very well. But a few issues have come up with Beta1 and 2:
1. Offline installs are no longer working, and
2. The new Wubi pre-installed image doesn't work properly
Offline installs
When you're testing in development, it's best to use something like zsync to keep your Ubuntu installation CD ISO up to date - it changes pretty much daily as developers release package update frequently - and if you don't use zsync you have to download the whole desktop CD image (700MB) when zsync might only need 100MB. By placing the ISO and Wubi.exe in the same folder, you can install it easily and quickly. Even if the ISO isn't the latest, disconnecting from the internet will stop Wubi trying to download the latest.
But this is no longer working since Beta1. Wubi.exe no longer looks in the current directory - it just downloads the new pre-installed image (more about that later). There is a workaround... copy the ISO to the root of a partition e.g. E:\ and Wubi thinks it's a CD and will use it.
New install method
So what is this new install method? Wubi.exe used to download the desktop CD ISO when it was run standalone (and didn't find a suitable image in the current directory or other drives). Then it would preseed Ubiquity with some special instructions to format and install to the virtual disk. This means Wubi had a two stage install - first Windows, and second, the regular Ubuntu install (ubiquity).
New with Oneiric Beta, when Wubi.exe is run standalone, it downloads a pre-installed Ubuntu image and expands that on the virtual disk. So this removes the need for the second, Ubuntu install stage. It just boots the image it downloads, and the preseed file just contains the user info, which is used to setup the users account details.
So that's great - it's quicker to boot. But the problem is it's not quite working. The swap file is no longer setup, there is no /etc/fstab so performance can be sluggish. Another bug that didn't setup the grub.cfg on the new image has been fixed so hopefully these other issues will be fixed soon as well.
Note that the preinstalled image uses the ext3 file system (Wubi has used ext4 since release 9.10) - I'm not sure what the reason for this is.
