Laura, thanks for referencing those instructions for Soundflower.
I tried all of those instructions, many different ways, always resulting in static - white noise, basically, being recorded.
I can see when viewing the Procaster Audio Mix that it seems to be picking up my Skype friend's audio based on when he speaks it changes the little green bar lights in conjunction with his discussion.
And I can hear him talking just fine on Skype.
But Procaster is only recording static. I tried it like 8 different ways. I did the Soundflowerbed options as well. I tried shutting everything down and changing the settings first, then launching Procaster. I tried restarting my computer.
I have OSX Snow Leopard, so I don't think I would need Lion patch.