Blending different thread colors together to create a smooth transition from one to another is probably the most difficult technique in digitizing. However when you are digitizing florals it is pretty much unavoidable. In the example to the left and the close-up above it you can see a couple of techniques you can employ fairly easily.
First it is very important to have a good underlay base to begin with. I recommend a diagonal lattice as this will give you the best coverage and stability. Once you have a good underlay you can be more creative with your top stitching densities. The big worry when blending thread colors together is build up of density where the two or in some cases three colors meet and overlap. So being conservative (as low as possible) with densities is always a good idea.
Another apect of blending to keep in mind is that you always want to make sure that the areas that you are blending are as parallel as possible, this will give you the smoothest progression from one color to another.
In the closeup of the petals you can see that the middle tone is laid out first it is then accentuated with both lighter and darker shades in a much lower density. The last step is to further define it with defining running stitches in a fourth and yellowish shade. The overall effect is a very lifelike and three-demensional Hibiscus. If you would like to see all 20 floral designs from the "Fabulous Florals" embroidery design collection you can see them at http://www.kenparsonsdesigns.com/viewables.php?cat=1&list=fabulous_florals