Blizzard CM Datth explained to us how to get the new fancy shadows working in the Lich King Beta a few days ago:
[blue=http://www.wowblues.com/us/new-client-features-8202530869.html]Shadows!
config.wtf - SET extShadowQuality “X”
in-game - /console extShadowQuality X
- Valid numbers range from 0 (old shadow system) - 6.
2 and up seems to deal with the distance of the shadows
Shadow discussion - Increased Shadow Quality[/blue]
This new feature produces really cool looking shadows, including life-like ones from your characters, instead of the grey blob we have now. Dadesign2 filmed a couple of examples of these new graphics, check them out below:

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I read on another site (wotlkwiki.info) that while 0-6 are valid parameters for this, 5 and 6 are only for the dev team in testing. So, check before assuming its broken as 0-4 may be the only valid entries for this in Beta and when Lick King goes live.