I also had this problem. 
I salvaged my installation, but I'm still not aware of what actually solved the 
problem.  I'm also not sure how stable my system is now.

Here is what I did, but I can't say I figured out the cause-effect
relationship. It did lead me to the right path of a working computer.

My intention was to backup my home folder to a networked computer,
thinking I would have to do a fresh install, but I ended up fixing the
problem (however inelegantly).

My first clue, in retrospect, was that after the upgrade, but before the
restart that started the busybox-syndrome, I did look at my menu.lst
file, and it looked like a hybrid: it had duplicate sections, with one
referencing 2.6.24-17 and the other referencing 2.6.24-16. I trusted
that this was normal, or at least acceptable to the OS. Well, maybe it's
not.

1) I loaded the LiveCD and started a live session (I'm not sure how you would 
do this in Wubi but I think you will have a parallel).
While I was initially able to see my home folder, I couldn't copy it, because I 
didn't have permisison to do more that look at. So, I asked for help.
References:
https://answers.launchpad.net/ubuntu/+question/34816

2) I followed Knut's first suggestion to run " 'sudo nautilus' in a terminal. 
This will open a new window witch have root rights."
Note: I'm not sure if this step was actually necessary, but I did in fact do 
it. I got a terminal window as expected, but I also got an error message. 
Regardless, I kept open the terminal window that appeared and used it for the 
following steps.

3) Because I have some experience editing my menu.lst file to get Ubuntu
stable, I went into the folder that houses the file.

4) There I deleted the "hybrid" menu.lst file and restored my
menu.backup file from the pre-2.6.24-17 upgrade.

5) I also saw "duplicate" files in the folder: one set for linux 2.6.24-17 and 
one set for 2.6.24-16. I deleted all the files with 2.6.24-17 in the file name.
I did this because of your successful troubleshooting.

6) Rebooted...all was well.

Now, *what* actually worked? I'm not sure. I'm not in a position to
experiment, since I have to keep the computer up and running for my
father.

So, the logical question is: "Which kernel am I actually running? -16?
or -17?" At this point, I'm not aware how to determine that.

I think we're narrowing down the problem though.

-- 
kernel updates get hardy boot stuck in busy box
https://bugs.launchpad.net/bugs/236307
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