It's just plain displacement mapping. It's a very simple (and old), but versatile technique allowing a large amount of effects to be done. The first time I saw this was in 93 or 94, rendered in real time in 256*256 in 25 fps, on an Amiga running a 14mhz 68020 processor. THAT was impressive to me, but seeing this 15 years later in 15-20 fps in Flash on a 2ghz machine just isn't.