Chloe,
A USGS .dem file does not need to be converted to GRID format for use in ArcGIS. We read .dem files directly. Just open ArcScene and navigate to the raster and add it using the Add Data button. You probably will have to calculate statistics on the dataset before you can use it. Once it is in ArcScene, open the layer properties and go to the Base Heights tab. Set the layer to have its heights based on itself. Also, the data is most likely using a geographic coordinate system. I recommend projecting it into a projected coordinate system appropriate for the area to ensure that the X, Y, and Z values are all in the same unit of measure (feet/meters). If you do not want to project the data (use bilinear resampling if you do) you will have to set the vertical exaggeration in ArcScene to a really small number like 0.0003 for example, to account for the fact that your X,Y are in decimal degrees and your Z's are in feet/meters.
Eric