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** This issue is addressed in ArcGIS 9.0 Service Pack 2 (SP2) **
The Spatial Analyst extension does not currently remove temporary datasets created during processing operations. These temporary datasets may be created by running a function that takes feature data as input, such as the density, interpolation, and viewshed functions. Eventually, when looping through many iterations, the maximum number of files in a folder can be reached and the operation will fail.