Can't say I've noticed this. I've done quite a bit of autocrossing (on both street and race tires) and aggressive testing in closed parking lots and have never had power "cut-out" when DSC disabled. I also have an early 2001 model (August build I believe) and don't have the two stage DSC control.
I spoke with the head tech at my local BMW dealership and was told that, with the earlier models, the "traction control" is either completely on or completely off with the press of the button. This means that the DSC's functions of CBC (corner brake control) and ADB (Automatic Differential Braking) are both "off" leaving only ABS active. With the newer systems pressing the button once turns off ADB, the second time (while holding button for 5+ seconds) turns off CBC.
I'd suspect there is a glitch that doesn't allow the CBC to be disabled. I'd take it to the dealer and see if any fault codes come up on the computer.