A DEM (Digital Elevation Model) file is a file that contains the elevations of a square area of land (quadrant). This tutorial will show how to find these files, view them, and open them into sketchup.
Let's start by getting the necessary file(s). They are available from different sites. Here are some links that will help find the DEM files. Keep in mind that there are 2 formats: 10m and 30m. 30m means that elevation reading were taken at 30 meter intervals and 10m means elevation readings were taken every 10 meters. It is a good idea to download both. Some areas do not have the higher definition 10m maps, but 30m maps are available everywhere in the United States (I think).
MapMart - Seems to work well. Click on "Begin Search" under High Detail maps. Locate the area you want on a large map of the United States. This is an easier site than the gecomm site listed below.
GeoComm - This is a site I was using first. You have to create an account with them and the downloads can be very slow (15 minutes for 2 megs).
ATDI - I couldn't get this site to work, but supposedly they have everything you need.....
If you can't find the free DEM download or just don't have time right now, here is one of Mt. Baldy that I will use throughout the rest of this tutorial - Mt. Baldy DEM File
This step uses a program that is PC only. If someone finds a Mac solution, please let me know.
We need to open the file now and change to a format that Sketchup can read. The program I use is called 3Dem. You can download it here. This program will open and view the file. It can open multiple DEM files and "stitch" them together. It can also crop DEM files down to focus on a smaller area. It even has some video output capabilities.
The most important function of this program for this tutorial is to save the file as a USGS DEM file. Technically the file is downloaded as an sdts file and needs to be converted to a standard .dem file. The photo below illustrates this:
Download the DEM file I exported here if you need it.
The file is now ready to open in sketchup. In sketchup click on File>Import>3D Model> (*Note: The newest Sketchup release took out the 3d model or 2d model options. All import options are done through one import window). Now select the file you saved out of 3Dem. Mine is called baldy.dem. In the import window, you will need to change the import file type to (*.dem), (*.ddf). Also note the Options button on the right. Make sure to click on it and set the TIN Points settings. 8000 points will generally create a decent model but can be a little slow to work with. I have imported up to 50,000 points just fine. It was very slow to load and work with, but it created a very detailed model. 250 points (the default) is too low. You probably wont even recognize the land form.

Here is what my baldy model looks like imported with 8000 TIN points:

This model has some extra lines on the right side that need to be cleaned up, all the black lines that create the faces are showing and we want to hide or smooth them.
This model was imported as a grouped item. We need to explode it before we can work on it. Not all DEM files are imported as grouped models. If you click on it and just a single line turns yellow, it is not grouped and you can skip the exploding part. However, in this case it is grouped. When I click on this model, the entire thing turns yellow and there is a yellow wireframe box around it. If your model is grouped also, select it and right click on it. Then choose explode. The exploding process can be very slow. Now trim out any thing that obviously doesnt belong. I have some odd vertical faces on the right side of my model to remove.
After removing all excess lines and anomalies, go ahead and select the whole model. Then right click on it and choose soften/smooth edges. Move the slider up to somewhere just short of 90 degrees. I recommend checking both the "Smooth normals" and "Soften coplanar" boxes. Play around though. There are many different looks and effects that can be created using different settings here.

I like to remove all the black lines from my model, so go into View>Rendering> and deselect "Edges" and also deselect "Profile Edges". Here is a picture of what my model looks like at this point:

That about does it. The more elevation changes that a map has, the more TIN points it needs to create a high quality model. This model could use to have more than 8000 points to make it more detailed. I might try around 20000 if I needed a high detail model.
Play around with everything. There are things in the 3Dem program that I didn't explain, but it has some neat features. Let me know if there is anything I need to add to this tutorial or if you experience problems or have a different work flow than this.
Baldy.skp - My finished sketchup model of the mt. baldy dem file.
One thing I should mention is that the file downloaded from the website is encrypted in tar.gz format. If you unpack that file, inside is a whole chunk of *.ddf files. Sketchup supposedly can import the .ddf filetype also, but trying to import those directly only lead to problems and headache for me.