Your BIOS would have to be able to boot from usb *only* if you write grub to
the external drive. If you use the default and write grub (the Linux
bootloader) to the C: drive then the answer is no.

Once Ubuntu is installed you can get updates online in the same way that you
did with WUBI. (Other than the way they work you would notice no difference
once you are in Ubuntu.) The latest Ubuntu (now only in Alpha 2) comes on CD
*and* DVD, but it is not ready for prime time till the end of April. The
latest stable version(10.10) comes *only* on CD, but you can update as you
install and then after re-booting you can add whatever else you want.

The usual way to get Ubuntu is to download the ISO then burn it to CD or
DVD. I use DVDs even for the CD version cause they are cheaper and easier to
come by.

First back-up: If you have lots of room on your C: drive then I would copy
the files that you want from WUBI to a temporary folder on C. That way I
would have them in case WUBI no longer worked. Note: A regular Ubuntu
installation will overwrite the Windows bootloader which allows you to boot
WUBI. If you don't have lots of room then you will have to cross your
fingers or think of something else. Then once the regular Ubuntu is
installed you can copy the files from C to Ubuntu's home folder on the
external drive. Once you are sure that everything works from the external
drive you can remove WUBI from the Windows Control Panel (Add and Remove
Programs) and delete the temporary folder.

Things that may help:

http://www.ubuntu.com/desktop/get-ubuntu/download
https://help.ubuntu.com/community/BurningIsoHowto
https://help.ubuntu.com/community/Installation