try to copy the menu one level up, so it is at c:\boot and run w32grub with all the needed parameters rather than letting it just do the guess. I tried to make it as easy as possible but it obviously cannot handle all cases.

I believe it is

w32grub -d (hd0,0) -1 c:/boot/stage1 -2 c:/boot/stage2 -m /boot/menu.lst

You have an alternative which is to let LILO/GRUB to install to your linux partition and grab that out and put that into c:\boot.ini