I have a similar bug in 10.04 alpha.

I have "GRUB_DEFAULT=saved" set, run update-grub and can see that my
grub.cfg file has been generated to use the default entry, but my
grub.env file always contains this:

-----
# GRUB Environment Block
saved_entry=
######### (the rest of these deleted)
-----

My system never saves the booted OS entry and therefore always boots the
top menu item.

If I change the GRUB_DEFAULT= to a number it will boot that entry
correctly.

-- 
Ubuntu 9.10 DEFAULT=saved, Last boot = Windows, Grub comes up defaulting to 
Ubuntu
https://bugs.launchpad.net/bugs/503935
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