According to my sources, the cuttlefish (which is closely related to squid and octopi) has exquisite control over its pigmentation, such that it can change its patterning on the fly (as you will see in the streaming video below the fold).
Basically, each pigment cell has a cluster of muscle cells around it that control whether it is contracted (invisible) or relaxed (visible). Pigment cells come in several colors, and by controlling each color at the cellular level, this amazing cephalopod is able to blend in with its environment, mimicking plants, other animals, and rocks as it chooses, or by parading around in threatening or seductive coloration it can warn off predators or attract a mate.
Also interesting; even though cuttlefish can change colors, they cannot see colors, although they can detect polarization of light. So through some mysterious process, they can match their own coloration to that of their environment even though they do not have cone photoreceptors.