Disk performance is slightly slower. You should not be able to notice any difference under normal circumstances. The problem becomes more evident if you have little memory and use swap a lot or if your windows partition is very fragmented. It should be still far faster than under a typical VM or LiveCD.
The filesystem is less reliable than in a real installation. This is because you have 2 filesystems nested within each other which makes it more vulnerable than ntfs or ext3 taken individually. This can be an issue if you hard reboot (unplugging the power). Hard reboots are never ever a good idea, but even less so in wubi. We have taken some measures to minimize the risk (and will add a couple of tricks to next build), so that hard reboots can be better tolerated, but the rule of thumb is: do not hard reboot. In linux there are alt+sysrq key combinations if you get stack for any reason.
Hibernation / Suspend does not work properly. We are looking into this with the help of some ubuntu kernel devs. Either we'll fix that or we will disable hibernation/suspend.
A side issue is that with wubi people tend to allocate less disk space than they would with a normal installation (since they take it as a trial and then keep using it). Of course if the free space is over, it is going to create issues, but that is hardly our fault. We are looking into ways to expand virtual disks, but that would be a separate app anyway. That said in linux you can create a link from a folder within a real partition to a folder within a virtual disk, thus alleviating the pain.
In short: allocate enough space, do not hard reboot and do not suspend/hibernate. Other than that it should be the full monty: same speed (other than for #1), same hardware support/detection, same behaviour, same software. A small trade-off considering that we* provide what can possibly be considered the easiest OS installer ever created, whatever the OS.
As for long term use, I would consider wubi as a mid-term solution. You can use it happily for weeks and months, but because of the 3 issues above, if you find yourself using Ubuntu quite heavily, you might want to do a full installation later on. That said we have a tool to migrate virtual disks to a real partition (LVPM by tuxcantfly). So migration should be quite smooth (that should result in an installation which is 100% identical to a standard one while keeping your data and settings).
If you have a free partition or a spare hard disk and are confident about partitioning and ISO burning there is no much reason to use Wubi, just go straight for the full installation via live CD. But for people that do not know what a partition is, wubi is probably the best solution to date, particularly once tools such as LVPM reach final status. I hope that wubi will bring a small revolution to Linux installers and hence to Linux adoption, similar to what Knoppix/LiveCD did a few years ago', and I would not be too surprised to see Wubi clones implemented by other *nix distros in the near future.
(found on http://ubuntuforums.org/showthread.php?t=481219)