Hmm... That's a very interesting site you asked that question on.
Glest's has a few problems with shadows in my opinion. First of all, it doesn't have very strong shadow mapping, which can map shadows over all objects, and is the most realistic. Secondly, one MAJOR issue I have with shadows is that they have a cutoff range that is far too small! For example, if you move the camera far away enough from Object A, which is emitting a shadow, the engine stops rendering the shadow. This is necessary, but sometimes the shadow can still be seen at the point of which the engine decides to cut it off (and vice versa), making the shadow seem to instantly appear and disappear.
Likewise, sometimes shadows seem to shift position when you move the camera.
Both of these are seen in both MG and GAE, and subtracts from the realism of the game. For the first one, it can be solved by increasing the range of which shadows can be seen from objects, or, better yet, detecting if the shadow (since it can stretch massively) can still be seen by the camera before cutting it off. Unfortunately, I have no clue why the shadows seem to shift in the second problem.
As for blending into the ground, I think that the shadow can help do that. Most of the screenshots on that example page didn't show Glest with the shadows. Of course, it pretty hard to blend an object into the ground when that object (ie: a castle) can be placed anywhere and there's no way to modify the map to make sense for the model (or perhaps vice versa makes more sense). That would only work for something in a fixed location, which Glest is not. What the last guy suggested in your link does seem to be interesting... Would be nice to see how it'd look with more natural colours for the blending...
