1. On the fabric that will serve as the border around your applique, trace the shape you want to applique with a water soluble marker. Make sure you trace your image in the exact position you need it, because you won't be able to move or fix anything once you finish! What's done is done with this technique.
My appliques are circles, so I grabbed a fancy-schmantzy Shrek glass (please contain your jealousy over my uber-stylish glassware). It's about 3" in diameter and I centered it in the middle of my 6.5" square.
2. With both pieces of fabric right-side up, place your applique fabric (the one that will be showing through from the bottom) underneath the border fabric.
Try to make sure it's centered under the design you drew, and pin the fabrics together.
3. Stitch directly on top of the lines you drew with your marker.
4. Once you've sewn completely around the design, pull the top/border fabric up and away from the bottom/applique fabric. I usually pinch the fabric right in the center of the design and pull it up, and then flip the fabric over and pull the applique fabric down just to make sure they're completely apart. Clip the border fabric open where you've pinched it.
5. Stick your scissors into the opening and cut toward your seam, stopping about 1/8" away.
Continue clipping all the way around the inside edge of the seam until you can pull away the border fabric and the applique fabric shows through from the bottom.
The top should now look something like this....
6. Flip the fabric over, and trim the bottom/applique fabric so that only about 1/4" remains.
The bottom should now look something like this...
And voila! You're finished! Told ya it was easy. The awesome thing about this technique is that you can use fairly elaborate designs with ease. Even though my appliques were circles, I didn't have to do any of that annoying curve-clipping you have to do with regular piecing. Hallelujah for that! If you want to see what this technique looks like on a larger scale, you can view the quilt I made with these reverse applique blocks here.