I'm also experiencing this wobbly image issue, on one of my two TV's.
I have a 42" Panasonic TH42PD25 (I think that's the model) Plasma with an HDMI input. It's at least 5 years old (was a display model when I got it), and is the ED (enhanced definition) 720p model. This tv presents the wobbly image when connected to the ATV2. I also have a PS3 and a Motorola cable box that have been connected to this TV in the past via HDMI with no issues what so ever.
I also have a much newer LG 37" 1080i (model # unknown), about 3-4 years old, that has no issues with the ATV2.
The HDMI cable, used on both TV's to connect the ATV2, is brand new, shielded 3 foot cable. Again, works fine on the LG, not the Panasonic. As such, it would seem that this is not strictly related to an HDMI->DVI issue.
I have no idea if either TV supports HDCP, but I'm curious if there are other telltales, besides an annoying message that pops up on the screen, that the TV does not support HDCP. For example, could the wobbly aspect be one of those telltales?