@ventilator: Thanks for posting the cube map code.

Okay... what I have gathered this far is that there is a problem with some cards, maybe mainly GeForce, doing EMBM AND projected vertices at the same time.

Now what??? I have some ideas.... will have to work them out later tonight.
1). One option is to translate to vertex/pixelshader instructions.
2) Could also do a combo FFP and Vertexshader thing.

Here's the thing:
If this demo did not run on your card. Run the DirectX SDK BumpWater.Exe sample and see what it tells you. It tells me that it's running in the fixed-function pipe on my card. If it tells you it's running with a vertexshader, then we have a direction to go.
*Please report* what you find here. I want to translate things and ultimatley have adequate fallback techniques.

For those of us that like to tinker.... the BumpWater.Cpp is going to be our friend here.