A kernel upgrade can cause problems in a number of ways. It can happen in
WUBI or in a full installation. Drivers, especially graphics drivers, are
often linked to the kernel and sometimes a new kernel can cause things to go
awry. However, if you boot into an older kernel from grub things often work
as before. The kernel problem usually rights itself over time as associated
packages get caught up, or so I have found. So, I would not fault WUBI
itself. It is just a Linux thing because the kernel is so frequently
upgraded.

The only thing that surprises me was that it was 10.04. The kernel is not
usually upgraded much in LTS releases as these are meant to be more stable.
I don't have much experience personally though because I follow the six
month upgrade path and am running 10.10. These things are common enough
occurrences that I do not worry. I just boot into an older kernel and do
updates for a few days then retry the newer kernel and things just seem to
work for me.

The good news is that you resolved it and now have a full installation of
Ubuntu. Sometimes Vista can rewrite the bootloader so keep your Ubuntu disk
handy to fix it. WUBI is not meant to be a replacement for a full Linux
installation and it is not exempt from the peculiarities of Linux such as
you experienced where upgrades can be uneven and produce unexpected results.