||A heads up to all out there with add data crash problems, don't get caught up on looking for *.loc files or other files in particular. In your case its probably a different corrupt file type.
If ArcMap or ArcCatalog crash when you try to add data or view a folder remember this:
ArcMap and ArcCatalog always default to the last folder you used, i.e., when you hit the Add Data button it opens the last folder you got data from or the last folder you browsed in ArcCatalog. My suggestion for anyone with the crashing problem in the future would be to use windows explorer and delete the last files created in that folder, as they are likely the corrupt ones. Good luck.