Theon and his 20 men scales the wall and captured Winterfell. His plan was to have his sister send 500 men from Deepwood Motte to hold it, but she refused him, and he was too proud and angry to leave. In case it's not quite clear yet, Theon is a very tragic character caught hopelessly in the middle of the Greyjoys and the Starks, ultimately failing both houses.
The answer to your question isn't really that complex, although the HBO series does a poor job of explaining what's going on with Winterfell (mainly because they felt the need to insert 20 minutes of graphic homosexual sex into the episode while drastically slashing and altering the story). Had they spend a few more seconds and a few extra sentences of dialogue, it would all make a lot more sense.
As Kaner has alluded to, recall whom Robb Stark ordered to go liberate Winterfell. Once again it's difficult to do this because they spend no time developing Roose Bolton's character so they can show love scenes with Renly and Loras and Robb and his wife (who's character they completely F'd up). Anyway, Bolton volunteer's his bastard son for the task, and since the spend no time on Bolton, it stands to reason that they ignored his bastard son completely too. It also helps explain why you're asking WTF happened to Winterfell....
Frankly it's almost mindboggling to see George Martin cooperating with these assclowns at HBO. The first season was pretty damn good, but the second season has been absolute joke. Then again maybe there is a method to Martin's madness... I suspect that he loves the disconnect between books and series, because it creates controvesy, and thus interest in selling more of his books.
Bottom line: If you want to understand what's going on, read the books. If you just want to be entertained and can suffer through HBO's social engineering, watch the series.