Microstation version J or 7 & 8.0 DGN files are only supported through ArcMap Server and ArcMap services in ArcIMS. ArcMap 9.x supports it as a format and ArcMap Server supports it. All drawings must be served up front and added to the mxd. Layers cannot be dynamically added.
Documentation for support of MicroStation DGN files can be found in the Desktop Help System by way of ArcCatalog > Working with CAD data > About CAD data