Magrathea 2.0 - Building Mountains
Javascript: 272 268 233 232 201 192 189 188 178 180 characters

Thanks to @Sam for reducing it from 268 to 233 characters, and for @manatwork for another 1 char. @VadimR for pointing out a bug.

p=prompt(r=t='');s=' ';for(d=10;d--;r=s+q+s,t+=q.trim()?q+'\n':'')for(q='',i=0;i&lt;p.length;)q+=' \\/v^'[p[i++]==d?4:(/\^|\\/.test(r[i-1])+2*/\^|\//.test(r[i+1]))*(r[i]==s)];alert(t)


Properly idented and somewhat ungolfed version with comments:

// The output initialization is just a golfing trick suggested by @manatwork.
input = prompt(state = output = '');
space = ' ';

// Repeat for each line, from the top (the highest peak, highest digit) to the floor (digit 1). Start at 10 to avoid a bug.
for (digit = 10; digit--;

      // Update the state of our automaton, at the end of the iteration.
      // Add a space after and before to simplify the future pattern recognization.
      state = space + line + space,

      // Add the line to the output if it is not an empty line, at the end of the iteration.
      output += line.trim() ? q + '\n' : '')
{ // This curly brace was added for readability, it is not in the golfed source.

  // Analyze each character in the current state to produce a new state, like a cellular automaton.
  for (line = '', i = 0; i &lt; input.length;)
  { // This curly brace was added for readability, it is not in the golfed source.
    line +=

        // If the input is the current digit number, evaluate to 4 and put a peak in this character.
        // Otherwise evaluate this expression with those rules:
        // 1 means that the hill is higher only at right in the previous iteration, we do climb it to the right in this one.
        // 2 means that the hill is higher only at left in the previous iteration, we do climb it to the left in this one.
        // 3 means that the hill is higher at both sides in the previous iteration, we are in a v-shaped valley.
        // 0 means nothing to do here. If the middle is not a space, it will be multiplied by 0 and become 0.
        ' \\/v^'[input[i++] == digit ? 4 : (/\^|\\/.test(state[i - 1]) + 2 * /\^|\//.test(state[i + 1])) * (r[i] == space)];
    } // This curly brace was added for readability, it is not in the golfed source.
} // This curly brace was added for readability, it is not in the golfed source.

// Give the final output.
alert(output);


As you may note from the code, this works as a cellular automaton, where each cells checks for a number in the input, looks to itself and to its two neighbours to decide what the next iteration will be. At each moment a cell may be a ^, /, \, v or . The input provided in the test cases produces the expected output.

Note that using the alert box sucks, since it normally does not have a monospaced font. You may copy &amp; paste the text from the alert box to somewhere else for a better appreciation of the output, or you may replace the last line alert by console.log, but since this is code-golf, alert is shorter.

Further, it does not validates anything in the input. It simply considers unrecognized characters as spaces the same way it does to . (in fact . is an unrecognized character too).