The most interesting thing I see in your menu.lst file is that it doesn't mention ANY version newer than 11.10. I suspect that your upgrade to 12.04.1 didn't do all that it was supposed to do, and left you with a system that's betwixt and between 11.10 and 12.04.
Your previous list of the report from update-grub clearly shows that it was processing 12.04.1, but then says it applied its findings to update the menu.lst file -- and your listing of that file doesn't show any of the eight 3.2 kernel entries resulting from subsequent updates. What this implies to me is that the updating of menu.lst simply didn't happen despite the report that it did.
Were it my system, I'd be inclined to purge the current grub packages and re-install grub from the Live CD, taking care to install the latest (grub2) version rather than "legacy grub." This would bring that part of the system up to date and make it easier for the rest of us to advise you, since only a few of us old-timers remember enough about "legacy grub" to spot problems. I resisted the change to grub longer than most, but eventually gave up and made the switch when I replaced 8.04 with 10.04 as a clean install. Now it has changed again so a clean install of 12.04 is still different. I have 12.04 on another box and continually run into these differences.
However, Doug has been helping you the most, and I certainly don't want to butt into his advice. I jumped in only because I do remember parts of the legacy grub system and felt I could probably help.
The lines that follow the default options, grouped together with the first word of each group being "title" are the legacy version of the "menuentry" areas of grub.cfg. Each group is called a "stanza" in grub-speak. Each stanza provides a single line of the displayed menu, together with the data and commands that implement that choice.
If your menu.lst file had stanzas for the eight 3.2 kernels shown in the update-grub report, all you would need to do is change the "default=0" line near the top of the file to refer to the one you wanted to boot automatically. The "0"th stanza is the first one, and as you can see from the update-grub report, they are sorted with the newest one first, so "0" is usually what you want. Since it does not, though, the entire update process seems suspect.
You could manually edit an appropriate stanza into the file, but Murphy's Law would probably strike and leave you with an unbootable system. That's why I would nuke and rebuild.
What's your opinion, Doug?