ok, yesterday i did exactly the same thing, i choose 'DirectPlay' and hit the host button (just testing, i only have modem). The game freezed and i waited a while, nothing happened so i pushed restart. When i got back to windows, it popped a message telling me that my desktop folder had disappeared. Well that was great news! especially because i use the desktop folder for all my "temporary" stuff, something like 2gig's of stuff i have collected over the years...
The formatting had stopped in the 'Documents and Settings' -folder, and i noticed that 'boot.ini' -file and 'C_DILLA' -folder had disappeared from the root dir. See what i'm saying? The files are deleted in alphabetical order, i don't think just normal format would do that.
The Windows XP's 'system restore', recovered couple of files, and all the empty folders, but it also messed up the hd so badly that it was impossible to recover most of the files with programs, that are made for that purpose. (silly me, i thought the system restore would bring all the files back..)
I just created a new partition for Flashpoint, and i will start debugging it to see what causes this horrible action. Is this some fancy FADE stuff? I use the no-cd crack because it makes life a lot easier (i have one cd-drive, and i play OFP a lot, get the hint?), but as a programmer i would never even think such a protection for game. Maybe the coder's original idea was to start scanning and deleting the files from the game folder, but he never tested it. Maybe it's just an accident, the program starts to clear some temporary folder and instead, starts to format the root. Well either way, i hope i find out the reason.
EDIT: yep, just tested, it happens with the original exe too, so i guess the files get deleted by accident.