Basically it's putting organza (or some other transparent fabric) on top of your completed applique and then sewing it down using an outline stitch. There are a few tutorials online:
http://mybyrdhouse.blogspot.com/2007...k-flowers.html
http://vintagethreads.blogspot.com/2...-tutorial.html
Here's a book devoted to shadow applique:
http://www.amazon.com/Shadow-Appliqu.../dp/1564775070