Right this may be better off in the source code project but its also a WinXP Pro issue so I've decided to post here. Move at will (which you will anyway

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Ok so some of you may have seen a thread I posted asking for advice/comments on a new desktop I was buying. Well, I went and got it and it's setup and running sweet. Fully licensed Windows XP Pro SP2 with all the latest security updates. Except somethings missing. Freespace (2) Open isnt running on it (sortof).
Installed freespace, no problems, didnt try running it retail but instead copied all the 3.6.7 vps over and the launcher and the default 3.6.7 exe. The p4 optimised one. I dont know if that might be the problem (I'm downloading some recent builds and will try them. Any recommendations for stability?). Anyway, ran the launcher, 5.3, added a few command line settings, mostly graphical, and launched freespace on the retail campaign. It loaded ok, including the divx intro, but the mainhall (the aquitaine) looked pretty fuzzy/unfocused/pixelised and there was a very VERY noticible change in quality when a mouse pass causes one of the animations. From there I decided to exit and one I click that I was sure I wanted to exit, it crashed. Just froze on a black screen with the freespace cursor.
Thought, ok, strange but there are reported problems with XP Pro. Went back to the launcher, set it to 98 compatibility, and ran it. Except this time it didnt go into the launcher, it went straight into freespace, bypassing all the launcher screen and all the options. This time the intro video plays in a tiny size in the upper left of the screen but apart from that everything is as the first load. The main campaign, at least, seems to play normally, but it always crashes on exit and once shutdown it (the launcher I think) displays a error box: "Unable to open Flags file". I can sometimes see that the flags file is there or sometimes I see it being created after the crash.
This wouldnt be too much of a problem except for the fact that I cant get at the launcher at all. Has anyone seen this before and is there a fix for it or a workaround?
I'm guessing the tiny video display is just DivX 6.1 (I was hoping the new version would fix it) but that doesn't explain why it worked fine the first time.
Any ideeears?