It appears that the web.xml file is not loaded when using the binary or windows distributions of geoserver 1.4.0-M2. (I haven't tried other distributions yet)
Testing in eclipse does not have this issue, it has to be a real installation.
You can test by changing the data directory or the output strategies in the web.xml file. When the server is loaded and runs, those changes are ignored.
It defaults to "BUFFER" strategy instead of PARTIAL-BUFFER, and the data directory is the "webapps" folder, not the one specified in web.xml.
I will need Justin's insight on this one to fix it.