Man.... So I moved the mipmap instruction from after the "bmap _to_uv" to before it. The dancing pixels disappeard, but so did the nice gloss effect. Hmmmmmmmm, I'll have to see what MS does.

FYI: This is essentially the same effect that the vs11/ffp EMBM water uses. This is what I have learned so far:
1). I can pass just about any texture format to the ATI card and the EMBM gets rendered. As a matter of fact, in some cases it looks better than the V8U8 tex.
2). For the GF cards it appears we need to convert the texture to V8U8 format using the "bmap_to_uv();" instruction.

Sidenote:
Any SDK people have any ideas to pass difffernt EMBM UV texture formats to our effects?? Can we even use DX to CreateTexture and use it in the effect??