Did you ever figure out what was the issue? It seems as if I'm having a similar issue, I've been troubleshooting for a good 3 hours now and can't get past Reconditioning, and have the same error as you.
Mark - I've been through your troubleshooting and none of it has helped thus far,
Christine - I do have the latest version.
This is a wild guess...
Make sure your raster names are not to long. Sometimes (but not all the time) there is a limit of 8 characters. When I see a tilda "~" in a name, it makes me think that maybe the program is shortening the name someplace. Then, when it tries to call it up, that file isn't there under that name.
If its is not the file name, maybe the directory name has a character in it that might be recognized by the operating system, but not the program. I don't typically use spaces, dashes, and other special characters (@ $ & ^ > ~ etc.) in my directory or file names. Underscores are OK (_)
I had the same issue. What I did was exported my DEM which was in a '.tiff' format into an ESRI GRID. Then I ran the DEM Reconditioning tool on my Local 'C:' drive. This fixed the error 010316 Error on my end.
One other thing that may help (and the files are related to DEM Reconditioning...)
Put the agreestream layer (and inner and outer walls) in a geodatabase. When I started using this practice, things seemed to run solid for me.
At the time I had "heard rumor" that regular shape files were "less stable" than geodatabases, so, I gave it a try and it seemed to help.