Direct lidar sources (such as LAS) can not currently be directly handled. (yet) Rasterized lidar elevation data can be served. The methodology is to create a Elevation based Images Service Definition and then serve this. A number of different formats are supported as part of the Elevation raster types and they system will mosaic the elevation together that can be in different format and projections. A presentation on this was given at FedUC in Feb 2010 (see http://proceedings.esri.com/library/userconf/feduc10/papers/tech/feduc2010_image_services_for_elevat...) (It appears that this file is currently broken. I sill check and get it repaired.) The big advantage to serving elevation as image services is that you can create an elevation service that dynamically mosaics a lot of different sources together. Eg GTOPO + SRTM + NED + rasterized lidar Concerning the format of the data. Although GRID can be used as a source, I would recommend were possible converting to 32bit float TIF with LZW compression.. There can be issues in serving GRID files higher capacity servers. TIF works well. ASCII DEMs would work, but I don't recommend as they are very large and slow to read. The main issue in 9.3 with such elevation data is handling nodata areas. These are best handled by redefining the footprint of the rasters to exclude NoData area. Support for data with NoData is improved significantly at V10.
I did get my service to work, after a lot of help. The problem now is that I have one area that is showing up as no-data and while I have the data in the directory, I can't figure out why this one area is showing up as totally black in my preview and when I make a service
a service I made is here: add the service in arccatalog: meridian.forestry.oregonstate.edu/Arcgis/Services/willamette the service is called will_be and the error is in the lower right (east) part of the where there is an elbow of sorts... it shows up pretty well on the will_shade service (only part that is flat in the mountains...)
I'm not sure why the one area is coming up black. Please check the raster by adding it directly in ArcMap. Is it possible that it needs to be scaled? Yes you can get the system to exclude the NoData areas by redefining the footprints to exclude these areas. Use the recompute footprint by Radiometery function. You will need to set the number of vertices to something like 50 for these shapes. For elevation data is so sometime better to use a service process to classify the imagery into two colors, compute the footprint and then remove the classification process. This will not remove holes though. In some cases is it better to edit the edges or you may have a shape with the geometry and you can use recompute footprint by related geometry. V10 has much better support for NoData areas. For the data that you have that is ASCII DEM I would recommend you convert this to TIF wtih LZW compression. It will be much smaller and faster.
I've checked the raster, and it looks good when I add it directly into arcmap. I've tried just about everything I know... I've put all the rasters in one directory (so no overlaps)... I've rebuilt statistics on the one raster... It keeps showing up black.
Check the properties of the raster that comes up black in comparion with the other rasters. There is a recent seperate review on a possible issue between some files that are MSBFirst vs LSBFirst. Some of the format readers can get this wrong. As timmerspk mentions, try converting that one file if necessary.