The Dropshadow plugin recreates a very common effect often done by hand in a paint or compositing program. It uses the LightWave image's alpha channel as a mask to lay a blurred, darkened area onto the background. This is a quick and cheesy way to emulate a true drop shadow.
The ``shadow'' is just a simple 2D effect, an offset of the shape of the original object onto the background. This is often appropriate for logos and 3D text. Worley Labs often uses this plugin for making web page images, since any graphic element can easily be given a quick soft shadow.