Thanks for the suggestions so far.  

I've been able to create a full depth, smoothed 16bit test image for the 
heightfield.  Unfortunately, even with 16bits, the stepping remains 
quite noticable.  I've got many many more steps than before, but they 
don't blend and remain quite clear.  The edges of each change in 
elevation are highlighted and it looks like a million slug trails over 
the landscape--or maybe those architectural models where they make hills 
from layers and layers of flatboard.  I think the problem lies in the 
terrain is mostly flat, with subtle slow changes in elevation causing 
the stepping.  Plus it doesn't seem to smooth between to areas, instead 
making a dimensional bump between two values.  Places with more 
pronounced altitude changes don't look as bad.  So I think 16bit 
elevation data has failed to solve the problem.  It appears I need to 
find a way to get smooth to behave, or find a different approach.

Using Heightfield "Smooth" tends to produce a more muddied look-- it 
appears as if there are only three levels of lighting--dark, med and 
light with no gradation between them.  It looks very posterized.  It's 
almost as if the normals are quantized and only allowing for three 
levels of specular lighting effect.  Plus the boxes problem remains 
(which might be related--more gradations might make the boxes harder to 
notice).   I've tried changing my scale factor, in case it was a 
precision issue, but no change.  

Anyone have any further ideas on heightfield smooth?

Thanks
Lars

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