It relies on both. The MBR is intact on my drive which is why it works even
though Windows itself won't boot. The Windows bootloader loads first, as you
know. It points to the Windows installation which hangs and Ubuntu which works.
When I choose Ubuntu it loads grub which lies in the root directory of the
Ubuntu installation in the Ubuntu folder on the C: drive which is also intact.
Grub then mounts the file system also from the C: drive installation as if it
was an actual drive instead of a compressed file using loopmounting. This is
this trickery that makes Wubi work.

This old drive of mine is now in an external drive case and Wubi still works,
but Windows won't boot from an external device even if the registry was okay. It
is 8.10 and I may keep it to play with after I upgrade to 9.04.

Like you, I am a big fan of Wubi and the fact that it can work when Windows
stops working is cool. The key to having a successful experience with Wubi is to
defragment your C: drive before installing Wubi and to ensure that your MBR is
not affected by a virus and that the file table stays intact. Other than this it
is a no brainer. It is the easiest way to try Ubuntu for a Windows user!

What I would like to see is for someone to try to copy Wubi from one drive to
another and see if you can recover it. The way that I would do this to backup
Wubi to an external drive. Install Wubi in another Windows computer. Replace the
new Wubi with the old one and see if it still works. It should work as the
difference is in the internal files, not in the Windows registry. This way you
can install your favourite programmes only once and use the same Wubi over and
over by just installing the basic one on a new computer and replacing the new
installation with the one with all of your programmes and files, a real time
saver.

A second project could be to try to install more than one Wubi on the same
Windows computer, lets say with Kubuntu. There could be no end to the fun!

At the very least this would give the user confidence that they can backup Wubi
and not need to worry if it gets trashed. If this works you could keep doing
this for as long as you like and keep the compressed Wubi files as a record of
various installations, sort of an Ubuntu Hall of Fame. You can tell that I have
too much time on my hands. :)

BTW, have you seen Portable Ubuntu which actually runs Ubuntu inside Windows
using coLinux? I would be interested as to what people think of it.
http://portableubuntu.demonccc.com.ar/