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