Major Nelson confirmed in his news post about the Fall2010 Update that the 'Boot to Disc/MCE' feature is indeed broken.
From support.microsoft.com:

When you turn on your Xbox 360 console, the Xbox Dashboard appears even when you have changed your startup settings to load a Disc or Media Center extender.

This issue occurs after downloading the latest System Update from Xbox LIVE and will be resolved in a future System Update.
Full Story: support.microsoft.com