Here are the basic settings that I used on a Mac to record Skype conversations using SoundFlower, Skype, and Audacity.
Default Input: SoundFlower (2ch)
Default Output: Built-in Output
Audio output: SoundFlower (2ch)
Audio input: SoundFlower (2ch) (if you wan't to record both sides of the Skype call)
Built-in Microphone (if you only wish to record the other side of the conversation)
Recording Device: SoundFlower (2ch)
Playback Device: Core Audio: Built-in Output
You could record many other things using similar configurations. Happy Recording!
Update: Since writing this I happened to come across another tutorial on doing this with pictures, that you might wish to follow.