If you have an older version of TrueSpace, or the current one, version 7.51, There is a website that has a plugin for generating waves, and ripples, which is useful for making wavy water, or cloth moving, like a flag. I've tried this plugin in Truespace 7.51, and it's called WaveGenerator 1.5. It works great!

Here's the link (it's a free demo):
http://www.kinneret.co.il/lgsoft/prod01.htm

By the way, TrueSpace 3 is free and you can get it here:
http://forms.caligari.com/forms/ts3all_free.html

- just fill out the form, follow the steps, and your serial number will be e-mailed to you. If you don't have DirectX, you can dowload it there too.

Here's another link with tons of TrueSpace plugins:
http://freecp.sourceforge.net/

And here's one with lots of shaders (including "fake caustics", and many others):
http://www.geocities.com/herbie_west/shaders.html

Hope this helps ya!