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ArcMap and ArcCatalog do not recognize DTED Level 2 files, even though they are included, along with DTED Level 1 files, in the Raster Format Browsing list on the Raster tab of the Options dialog box. DTED Level 1 files display fine.
Only the file extension for DTED Level 1 (.dt1) is listed as an extension in the Raster Format Browsing list; thus, DTED Level 2 (.dt2) files will not display.
A workaround is to type the DTED Level 2 file extension in the Raster Format Browsing file extensions list.