I have found the issue in other recent versions also, and sadly, in cases without updates.

INSTANCE #1: (Without any updates)

A few days back I mentioned @ https://bugs.launchpad.net/grub/+bug/477104/comments/185 (which is on same issue in karmic) that by copying wubildr and wubildr.mbr from X:\ubuntu\winboot\wubildr onto X:\ solved the issue. After this change I updated ubuntu (maverick), and could boot fine.

But I was wrong. A day later I couldn't boot again, and got the same old "Alert! /host/.../root.disk not found. Dropping to shell!" followed by (initrafms) prompt. Here I tried a few recovery steps mentioned in Wubi megathread (http://ubuntuforums.org/showthread.php?t=1639198). After trying to manually boot, I got an "ata10: SATA link down" error. I thought something was wrong with my partition, so I rebooted to windows, and uninstalled wubi. I deleted the partition and formatted afresh. I have two drives - sda (windows), sdb (ubuntu). The exact partitions are verified by boot-info-script. I did a 20GB clean maverick wubi install on the 22GB sdb1. I logged in to ubuntu desktop, and unlike other occasions, did not run update. I shut down ubuntu. I booted again, and found myself at initrafms prompt!

In the initrafms prompt, the contents of /host were found to be same as that of sda1, i.e. C:. To make the bootloader find root.disk in it, it must point to /dev/sdb1, because there is no root.disk in C:. Now I mounted /dev/sdb1 to /mnt/win1. When I checked its contents, it was same as /dev/sda1, and NOT sdb1. I suspect this issue is because of a different partition of wubi than C:. If wubi was installed in C:, /host would have always had root.disk.

When I checked /dev, I could see all partitions of sda and sdb. The fact is the drives are not mounted properly.

INSTANCE OF ISSUE #2 (During install)

Although it uses the same bootloader+wubi combo as the affected ones, I gave Kubuntu Maverick a try. The issue could be reproducible even quicker. This time I got "Alert! /host/.../root.disk not found. Dropping to shell!" just after the machine rebooted for the second time during installation (to recall the two instances of reboot during installation - 1st is when you complete wubi wizard in windows, 2nd is when it finishes installation before loading the desktop).

Not simply chkdsk, I did full format of the partition before install, if you are asking (I don't think it matters).

In the last one week, I have tested all ubuntu >= 9.10 as they ship with grub2. I found the issue to occur
1. after updates (9.10, 10.04, 10.10)
2. without updates (10.04, 10.10)
3. even before it is fully installed! (10.10)

Practically, almost at EVERY instance of grub2+wubi usage. The lone savior in grub2 usage is base 9.10 without updates. But I can confirm consistency in 10.04 and 10.10, and also in 9.10 by updating to a later kernel than 2.6.31-14 and a later grub2 than 1.97~beta4-1ubuntu3 (the base versions that come with 9.10). I think the issue is therefore with the later versions of them combined with wubi. Since I don't get the issue in base wubi 9.10 without updates, it would be incorrect to suspect my bios or drives. And of course there is no issue with grub-legacy (<=9.04).

If there is anyone from Canonical Release team reading this, please make it a point to release a grub-legacy + wubi ISO of the latest Ubuntu at least if possible, till the issue is resolved. This is not less than a show stopper. I think it's just a matter of luck if by following one of the several solutions in forums, you are able to boot. The problem is elsewhere.