I ran into the same problem.  That is, update-grub did not update menu.lst 
because I answered "keep old version"
Note that with "Keep old version", update-grub will not install new kernel 
images into menu.lst

The wording seems wrong, since I interpreted "Install package
maintainers version" to mean that all the changes I have done to
defoptions will be thrown out.

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update-grub not updating menu.lst
https://bugs.launchpad.net/bugs/202009
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