Original User: hlzhang
It looks that you intend an 'identity' image service from DEM (i.e., AS IS of elevation values).
If so, not feasible to get it in Image Server 9.3.x. As Jeff indicated, it is known issue. In Image Server 9.3.x, only three derived images from DEM sources can be created, that is, Hillshade, Elevation Coded, Shaded Relief under Elevation catalog.
So, you need use Mosaic Dataset in ArcGIS 10 to create it (see the attached snapshot, where the surface elevation is minus 426 m, the lowest sea surface in the world).
When using Mosaic Dataset in ArcGIS 10 to create 'Identity' image service from DEM, however, two things should be paid attention to:
Firstly, make sure that you use 'Identity Function' rather than 'Stretch Function' in the function chain;
Secondly, if the boundary of DEM images is irregular, you can 'immediately' run 'building footprint' script after loading DEM in GRID, in order to remove NoData. In this way, it usually wouldn't affect '0' values (if '0' value is the sea surface).
Of course, when DEM in TIFF used, minimum value like 0, or -200 (default is 1) should be set up properly, before runing the 'building footprint' script. However, when DEM in IMG used, be cautious (I had a feeling that some bugs exist in 64-bit ArcGIS 10 SP1).