Alright, thanks to R0J0's hint I fixed up another Shader - Flag (aka Snake)!
Since we have some limitations it will work properly with a certain type of image, but when it does it's a rather neat™ effect.
Added to the main thread.
PS. Hey, TiAm - the game has either flags or snakes, right?
PSPSPS. Add a little sine for height and you can get some rather neat effects:
What I like about this is that you get perfect seamless looping within the given time. So you could probably go crazy with the shaders - capture the result and have some neat looping animations.