btw fester when coverting the dem files into photoshop how do you get them so feet 0 is feet 0 because i am having trouble.
I think I had the same problem you described. Here is my fix.
Open the DEM file (Open as -> RAW) 4800 6000 etc..
Change the DEM file to 8-bit/channel. Photoshop won't edit the 16-bit/channel, that is how the DEM file is opened.
Select by color, the lowest area. Fuzzy factor about 20, created a new layer and fill it will 100% gray. I named it "water level."
Create an levels-adjustment layer between the background (DEM) and the "water level" layer.
This let me adjust the terrain gray levels without effecting the water.
When you're done, merge the layers and save the result.