Needle felting is a sculptural technique invented at some point in the 80's, sort of a spinoff of industrial dry felting. It works by poking wool repeatedly with a specially barbed needle, which makes the fibers lock together and increases the density of the fiber. You can make 2D appliqué embellishments like this, or you can build upon it sculpturally by adding more and more wool, manipulating the shape by poking more here and less there and/or adding a little more wool in places. It's really easy to pick up on, easy to fix mistakes, and basically all around awesome.
Zeilinger Wool Co. - Their 100% White Craft Wool/Felting Batt is great as a core wool, and is wonderfully dyeable.
American Felt and Craft - They have batting only every once in a while and it sells out fast, but they have needles and roving and foam pads.
Living Felt - A great resource all around, with supplies and tutorials aplenty.
Felt Alive - A lot of great information here; tutorials, more resources, and also the home of the Felting Forum, which has many golden nuggets of information in its many posts.
Dream Felt - Carries a lot of C-1 Wool Batt, which is the favorite of a lot of people.
Mielke's Fiber Arts – Good place to get cheap NZ Corriedale top, huge selection of colors. Sells the Fiber Artist's Bag of Candy, a sampler bag with 50 different colors of perfectly unsplotchy Corriedale top, for $26. Great for playing with color.