Why does for/while loop delete string unexpectedly?

In the interests of demonstrating better coding style, I've taken the liberty of rewriting your script below:

def get_user_in(message, valid_responses):
    while True:
        user_in = raw_input(message)
        if user_in in valid_responses:
            return user_in
        else:
            print "Please choose from: {0} or {1}".format(*valid_responses)

def find_and_remove(co_name, infile, outfile):
    pattern = co_name.upper()
    for line in infile:
        if pattern in line.upper():
            print line
            answer = get_user_in("Remove this line? ", ("yes", "no"))
            if answer == "no":
                outfile.write(line)
        else:
            outfile.write(line)

def remove(filename):
    outFilename = filename + '.tmp'
    with open(filename, 'r') as infile, open(outFilename, 'w') as tmpfile:
        co_name = raw_input('What company do you want to remove? ')
        find_and_remove(co_name, infile, tmpfile)
    os.rename(outFilename, filename)

See Joel's wiki answer for a great example of how to redo this whole thing.

But as for fixing your error...

I finally realized what it is that is the big different between your two examples. It has to do with when you perform the rename.

In your first example, when the user says "no", returning from the entire function prevents your os.rename from every happening. The result is that you see a completely unchanged original .txt file.

In your second example, if the user says "no", you return from the sub function back into the main one, but os.rename no matter what happened. That means if they said no, you don't write any more lines but you still copy over the half processed tmp file.

While I honestly think the entire thing should be rewritten, a simple tweak to your current code would be for the find_and_remove to return whether the process succeeded, maybe with a bool:

def find_and_remove(f,coname,tmpfile):
    ...             
                elif answer == 'no':
                    return False
    return True

def remove():
    ...
    success = find_and_remove(f,coname,tmpfile)
    f.close()
    tmpfile.close()
    if success:
        os.rename('codilist.tmp', 'codilist.txt')

Honestly though, you should look into using the with context for opening and closing files so you don't have to mix up a bunch of conditions of when to close the files down. You have them being closed in two different functions.

The with statement

with open('infile.txt') as inFile, open('outfile.txt', 'w') as outFile:
    for line in inFile:
        outFile.write(line)

When the with block ends, it closes the files.

It looks to me like the problem is the return in the "no" clause. That exits the function before the tmpfile.write(line) method executes, so it makes sense to me that it looks like the string is deleted. What I don't understand is why it would work in the first function.

In the second case, you only return out of find_and_remove when the user types no. In the first case you return out of the entire function.

I had the same idea as Joel, but a bit slower... regardless, hope this is of interest:

COMPANY_FILE = 'codilist.txt'

def load_companies():
    with open(COMPANY_FILE) as inf:
        return filter(None, (line.strip() for line in inf))

def save_companies(companies):
    with open(COMPANY_FILE, 'w') as outf:
        outf.write('\n'.join(companies))

def get_option(prompt, options):
    options = [opt.strip().lower() for opt in options]
    prompt = "{}? [{}]".format(prompt, '/'.join(options))
    options = set(options)
    while True:
        res = raw_input(prompt).strip().lower()
        if res in options:
            return res

def remove_company(remove, companies):
    ask = lambda c: get_option('Remove company {}'.format(c), ['yes', 'no'])
    return [co for co in companies if remove not in co or ask(co)=='no']

def main():
    companies = load_companies()
    co_len = len(companies)

    remove = raw_input('Name of company to remove?').strip()
    companies = remove_company(remove, companies)

    if len(companies) < co_len:
        save_companies(companies)

if __name__=="__main__":
    main()