Full disclosure. I "cheated" and used a co2 laser engraver. It allows me to cut out the inlay material and the recess.
I have done larger inlays by hand. My method is roughly this:
choose a design. Print it on normal paper. Spray adhesive it, or use graphite tracing paper to transfer the design to template material (plywood, mdf, etc.) Then cut out with scroll saw, bandsaw, jigsaw, etc.
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then i use a router inlay bushing set
in conjunction with the template to cut both the positive and the negative pieces by adding/removing the small bushing in the linked set, which offsets the cutter just enough to allow the two pieces to fit perfectly. Then it's a matter of gluing them together.
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https://www.youtube.com/watch?v=PwS1NSg_EB4
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this is the youtube video i lused to allow me to learn the mentioned technique.
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I've also seen it done where you simply cut the desired shape you'd like to inlay, set it onto the workpiece, trace it and then carefully freehand route the tracing, and clean up with sandpaper/chisel.
http://www.amazon.com/Whiteside-Router-Bits-9500-Solid/dp/B0012JI6HM
Might lead you the right way
Just get the template bit and bushing. Make your own template out of 1/4 inch plywood.