When you run MasterUpdate mode a window will open and start to list all the mods that you have checked in FOMM. You will know if it is working properly if the mods you have checked in FOMM are in bold type. This means the Master flag has been set. Once this has stopped just close the window and start your game. If this is not what happens, check your spelling first, FO3MasterUpdate. If the spelling is correct, download the latest version and re-install. Make sure all files included in the download are extracted to your Fallout folder.