This is using ICE (and pixel particles) to instance non-distorting image samples onto a deforming mesh. In this version It is grabbing a random section of a texture, but It can be also be controlled with precision, so you can have exactly what image you wish to have at whatever particle.
I am getting increasingly interested in the potential of texture manipulation and generation in ICE.. I'm also looking forward to trying out this Image input output plugin.
And even though this can all be done now, ideally the Softimage devs will add optimised and supported Image processing in ICE in the future.