I am not sure this is the right one, but check out:
www.homesteadhearth.com
go to catalog, then in search type "font"
this shows a CD where you "print, stitch and trim"
I saw this and thought the idea was great, but you should be able to do this with any font/size you want using a wordprocessor, you could also then do decorative clip art as someone else had suggested.
Print the letter(s) and attach to back of stack of 2 fabrics. Remember what you will be sewing will be the back side, so the bobbin will be the thread showing.
I suggest pinning to the back simply so that you won't have to worry extremely if all paper doesn't easily tear away. I suppose you could sew on the top fabric if you wanted to. Then trim the top fabric to be the applique after sewing. taking care not to catch the threads.
Wouldn't that work?