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Buffer should work only on selected points, if there is a selection (I'm using ArcGIS 10 - not sure if this is true in 9.3 and less). I don't see any way to avoid creating an intermediate layer, though (I just read this post, which describes the in-memory workspace, which may be ideal for your intermediates). Also, I'd suggest creating a model (or script) to run your workflow since you'll be going through several steps. You can always build the deletion of your intermediate files into the model if you want to avoid accumulating files.