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This error occurs when clicking OK on the Options window of Spatial Analyst:
"The Working Directory location cannot have a space in the path name. Please specify a new location."
The temporary directory path definition contains a space character.
The default working directory for Spatial Analyst on Windows 2000 is set by the TEMP and TMP user variables. After ArcGIS is installed, the initial path for this directory points to this hidden folder:
<drive>:\Documents and Settings\<username>\Local Settings\Temp
This path should not have a space character.
Do one of the following: