For example, in this case, the Shadow Mastiff can blend into the shadows and use them for "cover" granting himself total concealability. While he may now be a fuzzy blob of shadow, you still know about where he is. You can target his square without a problem ... you just don't know exactly where he is so when you swing, that tendril of shadow you thought was his noggin was just a shadow 50% of the time.
He does not become undetectable. In fact, you could read it so that Shadow Meld does not block Line of Sight. Blocking line of sight grants total concealment. Shadow Meld just grants you total concealment regardless of line of sight...