Put this iso in the same directory of wubi: http://osmirrors.cerias.purdue.edu/pub/ubuntu-releases/7.04/ubuntu-7.04-beta-alternate-i386.iso
Works for me.
Wubi is still a bit rough on the edges....
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There is nothing in the specs that I have seen that requires you to have it right up to the internet to work, so you can put a firewall, a router between it and the internet if you feel the need to.