If FMTONLY is ON, all queries return zero rows, so a variable assignment in any select has no effect, and the variable keeps its previous value, which is NULL if it was never initialized. Here is another example which works in SQL2000, but at any rate you can query any table you have permission on.

DECLARE @FmtOnlyTest int

set @FmtOnlyTest = 0

SELECT count(*) AS C FROM dbo.sysobjects

SELECT @FmtOnlyTest = count(*) FROM dbo.sysobjects

IF ( @FmtOnlyTest = 0 ) BEGIN

SET FMTONLY OFF

PRINT 'NOW OFF'

END