NOTE: Prior to performing these steps with your data you would want to ensure that the DEM and image have the same geographic extents.
We created a video to show that it is possible to use geospatial data and the 3D capabilities of Adobe Photoshop. It performs very well with a decent computer and video card.
In this video, a combination of Geographic Imager and Adobe Photoshop functions are used to open a DEM file using a script. The script also transforms a DEM into a 3D model and allows for an overlay of a colour model based on the data or a custom image (e.g. ortho image). Video after the jump.