If you mount the ISO using something like Daemon Tools, it should have wubi.exe autostart immediately and install using the mounted drive.
If this has changed in recent times, when you run the windows installer, you should be able to choose either the iso file or the mounted iso drive as the source.
Yes you are right, there is no manual source change option. You need do the below
How can I use a manually downloaded ISO?
You need to download the DESKTOP CD ISO of the appropriate version. Place the ISO in the same folder where you have wubi.exe and then run Wubi. For example, Wubi 11.10 requires the 11.10 DESKTOP ISO, available here.
Note that you need a DESKTOP CD ISO. A DVD ISO may not work (except for Edubuntu). Alternate ISO files are not supported.
Source : WubiGuide