Ben Houston of Frantic Films described the process as follows:
"We used level sets extensively to do both the tar monster and the fluid simulation work. The level set morphing was done between two RLE Sparse Level Sets -- one representing the animated Tar Monster and another representing an animated hand figure. Both level sets at render time where in the +50 million voxel range. We had an alpha parameter which represented the degree of blend between the two objects. At each frame in the blend sequence we moved alpha closer to 1 from the starting point of 0. Thus even though the source and the target were animated the blend looked smooth."
"We developed the scalable RLE sparse level set format as well as a level set morphing algorithm similar to that of David and Ross. In total there was about 6MB of C# code that was responsible for the Tar Monster effect in Scooby Doo 2. It took 6 months of work -- although the level set morphing algorithm only took about 2 or 3 weeks in total to get right."
"The level set morphing technique described in the research of David Breen and Ross Whitaker worked beautifully in the two sequences where we used it."
More information on level set morphing can be found here and in the following papers.
D.E. Breen and R.T. Whitaker, ``A Level-Set Approach for the Metamorphosis of Solid Models,'' IEEE Transactions on Visualization and Computer Graphics, Vol. 7, No. 2, pp. 173-192, April-June 2001.
D.E. Breen, S. Mauch, R.T. Whitaker and J. Mao, ``3D Metamorphosis Between Different Types of Geometric Models,'' Computer Graphics Forum, Vol. 20, No. 3, pp. 36-48, September 2001.