Jeff, even more interesting in match play is if the hits from the whites instead of the blues and knocks it OB, he isn't allowed to re-tee the ball. Since he hit the shot from outside the teeing ground, he must drop a ball, not tee it up. Of course, this would require a really nasty opponent to point it out to him. It is things like this that make match play so much fun.
The reason the penalty has to harsher in stroke play is because the final score does count, not just if you win the hole. In this case, there is no difference in hitting it from one inch in front of the tees than there is in picking up a one inch putt under the rules. You have to play the course as it is defined.
Darren, how would you have felt if the guy who you saw violate the rule had won the competition? What if one of the guys in that group in back of yours had noticed what he had done and come up after the round and said something to you about it? How would you feel because you didn't say anything? Remember that if he breaks a rule and you know it and don't do anything about it, you've also broken a rule. And the penalty for that is DQ.
dcarroll, it all depends on what is around the hazard. If there is just regular fairway or no other place for the ball to be lost, it is reasonable to assume it went in. But, if there are trees there or OB or rough long enough for the ball to be lost in it, you can't make that assumption.
Frequently many of the reasons people have problems with the rules are really because the Committee in charge didn't do it's job. For example, if I have 5 feet of deep rough and then a hazard, I would move the line for the hazard to the outside of the rough or get the superintendent to mow the heavy stuff down a little. This way if the ball goes in there, it is in the hazard regardless of where it is. Also, the player gets to drop in a better area.