Comment 10 for bug 653134

Workaround. I deleted everything in grub.cfg except the following:
bcbc@ubuntu:~$ cat /boot/grub/grub.cfg
menuentry "Ubuntu, Linux 2.6.35-22-generic" {
 insmod part_msdos
 insmod ntfs
 set root='(hd0,msdos2)'
 search --no-floppy --fs-uuid --set ea5cc2095cc1d10d
 loopback loop0 /ubuntu/disks/root.disk
 set root=(loop0)
 linux /boot/vmlinuz-2.6.35-22-generic root=/dev/sda2 loop=/ubuntu/disks/root.disk ro quiet splash
 initrd /boot/initrd.img-2.6.35-22-generic
}
bcbc@ubuntu:~$

It popped up the menu, and then booted successfully. So that's interesting.

I guess I'll try update-grub now and see what gives.