Ken,
Is the data you have available for download? Could you point me in the right direction so I can download the same as you? SDTS dem data from USGS should just work in ArcGIS per the link I previously provided. If the data was just in-house data and not recently downloaded we can work together to get the data here via our ftp site. I'm more concerned about it not working in its native form. The only oversight would be if all SDTS raster data is not readable in ArcGIS. When the 8.x toolbar, which was VBA, was removed along with pretty much anything VBA in ArcGIS, we added native support for this format. At ArcGIS 10.1, customizations built using VBA are no longer supported. We began this transition in 10.0.
I downloaded sdts dem rasters from GeoCommunity this morning and after unzipping the file, I could add the .ddf file right into ArcMap and begin other processes such as hillshade, slope, and contour. Attached is the native sdts dem raster displaying in ArcMap 10.1. It should be the same for 10.0, and you should not have to run any conversion tool. Perhaps you could contact Esri Support so they can troubleshoot - they have better tools for interacting with you than I do here on the forums.
Best Regards,
Eric