When I show my desktop with real translucency and window shadows, I am often asked how to do that. It's been ages since KDE is able doing this effect, yet not so many people are aware of it. So here I rehash the instructions in few steps (but remember: YMMV). In short: use KDE 3.4 or higher with the composite manager.
First step is to get accelerated driver for your X. This is not always necessary but often you get smoother performance. Beside, it's good to install it even if you don't need playing with eye candy anyway.
Next is to get the composite manager. Somehow I manage to make translucency and drop shadows only using the X Composite Manager from X.Org. The easiest way is to install the binary package. This step is distribution-specific. On SUSE, just launch yast to install additional software, search for xcompmgr and finish it with few mouse clicks.
Update (thanks to anonymous): you do not need this xcompmgr with KDE because KDE has its own composite manager already (kompmgr).
Now you have enable the composite in X. For X.Org version (like what is used in major Linux distributions), edit /etc/X11/xorg.conf. Please make a backup first, in case you screw your system. In this config file, make sure you have these lines:
Section "Extensions" Option "Composite" "true" EndSection
After this, check .xinitrc in your home directory, add this:
Log out and then log in again, or just restart your X.
Open a window, right-click on the title bar and choose Configure Window Behavior (you can also use Control Center to reach the dialog but I always find this way faster). Click Translucency on the left pane and the rest is self-explained. You just need to enable the effect and customize the translucency and shadows as you like. For example, you can make the window translucent only when you move it. Or even make every single window translucent. Same goes for the shadow settings.
Compare Konqueror's window without (left) and with (right) shadows:
and you certainly don't want to look back.