A shadow folder is a centralized folder on your network server that contains all the files in a project. Shadow folders must be set up by your VSS administrator.
A shadow folder does not contain the master copy of the files (the master copy of every file is in the VSS database), and it does not contain the local copy of the files in your working folder. It contains a copy of the most recently checked-in version of each file in the project. Therefore, it serves as a centralized area to view and compile your source code.
A shadow folder is completely optional. It is generally used in one of two situations:
Important Shadowed folders do not track changes to their subprojects. For example, if you have shadowed project $/A that contains two subprojects $/A/1 and $/A/2, and you rename $/A/2 to $/A/B, the name change is not shadowed. Project level changes need to be tracked manually, or you can use Reconcile All from the Project Difference dialog box occasionally to update the shadow folder. You can also repair a shadow folder with out-of-date files by performing a Get to the shadow folder.