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A data frame is currently set to a projected coordinate system, and data frame clipping is selected by enabling Clip to Shape in the Data Frame Properties dialog box. The default values for the custom extent clipping bounds seem incorrect, especially when the Degrees option is checked. When accepting these values, ArcMap fails to respond, it seems to go into a loop and eventually uses all the available memory.
The clipping dialog box allows you to specify clip bounds in either decimal degrees or projected units. If the data frame uses a projected coordinate system, the clipping dialog box doesn't use an inverse project to convert the projected units to degrees; instead, the source code tries to translate the map units.
There is no workaround for this issue.
Follow the link below to the ESRI Online Support Center, select ArcInfo Desktop, then select the ArcGIS 8.1 > ArcGIS Service Pack 1 and follow the instructions.