Source data is LiDAR mosaic processed to new raster as DEM and Hillshade. Other DEM surfaces were created from contours and spot elevations with Topo2Raster. All rasters displayed in Arcscene have the same problem.
In ArcScene when Bilinear Interpolation is used to resample the layer for better visualization straight line artifacts appear. If I choose Nearest Neighbor the DEM/HS display correctly without the lines but obviously don't look as nice as the continuous data settings.