The landsat data is a tif file. Could it be that the DEM data is a courser resolution data set than the landsat data? Thats the only thing I can think of.
I'm not sure I'm afraid. I have def managed this with DEMs coarser than the image to be draped but prob not as much difference as it looks like you have.
Is the DEM also a single file or in a geodatabase?
Have you deleted the pyramids? Only reason I suggest this is 'maybe' Arc renders the tif more like a gdb if it has pyramids (as raster sources in a gdb usually have.
The other place to try would be the ESRI mapping centre—I have always got good replies from the ask a Cartographer service.http://mappingcenter...?fa=ask.gateway