It installs Ubuntu as an application on windows and creates a boot menu option which can be used to run it natively on a hardware unlike VMWare installation.
NOTE: Wubi installer installs Ubuntu in a separate file on windows partition. This space is recovered once you uninstall the OS.
Steps:
Download Ubuntu Hardy iso image.
Download virtual CD software from Microsoft's website.
Double click the downloaded exe file and unzip it to a particular location.
Browse into the folder extracted now and double click VCdControlTool.exe
Click on "Add Drive" button to create a virtual drive.
Note: If you face problem in driver installation then "copy VCdRom.sys to your %systemroot%\system32\drivers folder."
For more details check out readme.txt
In the File Browse dialog select the Ubuntu iso image file which you downloaded earlier.
Now Right click on mounted ubuntu image and click "Auto Play"
It will launch a screen something similar to the one below.
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On reboot, you will see a screen similar to the one below.
Select Ubuntu using (UP-Down arrow keys) and then click enter.
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Ubuntu Hardy Heron (8.04) Beta's (April 24th - Final Release) default installer comes with Wubi, so it needn't be downloaded separately.
To install previous release versions of Ubuntu using Wubi, download Wubi and then install the OS from iso image using the same procedure.