When SE_shape_disjoint compares two intersecting linestrings, one of which partially surrounds the other, it returns FALSE. In this case it should return TRUE.
To work around this problem, test the linestrings with SE_shape_crosses,
SE_shape_touch, SE_shape_contains, and SE_shape_within.
If all of these functions return FALSE, then the linestrings are disjointed.
This problem is addressed in ArcGIS 8.1 Service Pack 1. See the Related Information section to download Service Pack 1.