Hi Mark, thanks for all these tips.
I am having this same issue.
I copied all the files from my company server to my local C driver and also saved the mxd files there. I also changed the Process extent to the size of the layer that is larger in extent.
However, this is still resulting in the same error.
It is strange because yesterday I went through the same process, without saving the input files locally, and I did not receive this error.
Currently, I am getting this error when using ArcHydro, Terrain Preprocessing, Fill Sinks.
I would greatly appreciate any further suggestions.
C