Troubleshooting Audio
Checking that Soundflower is working OK
1. Check that the volume level on the Soundflower 2ch device (both Output and Input) is not zero. You can check this inside the Sound Preferences, within System Preferences.
2. With iShowU running, and record computer audio enabled, play some music from iTunes and check that there is activity on the Input within the Sound preferences.
Make sure you've selected the Soundflower (2ch) device when you check this:

3. With iShowU running - and record computer audio enabled, play some music from iTunes. Does the system sound level meter witin iShowU show activity? If so you should also hear audio.
4. (Optional - depends on App) Does your application have way to route audio directly to the Soundflower 2ch device? Some applications do, some don't. If your application does, please configure it so that it is playing audio to Soundflower 2ch.
Note about Realplayer: It does not appear that RealPlayer is compatible with Soundflower. While iTunes (and others) are quite happy to play through Soundflower, RealPlayer is not. On top of that it doesn't provide a way to force the output to Soundflower. As of yet, there is no current workaround for this program.
Note on VLC: It requires a restart with iShowU already running to pick up the correct audio device.
More Detail
iShowU records computer audio using the Soundflower 2ch "device". It's not really a device - think of it more or less as a pipe. What goes into SF2ch comes outthe other end. So, if you play audio into the SF2ch device then you see it come out the other end (what is known as the input. Yes, we're aware this may twist your brain).
So the flow of audio is:
- An application (e.g: iTunes) makes some noise -> Soundflower 2ch
- SF 2ch (output) is piped to SF 2ch (input)
- iShowU records SF2ch (input)
At the same time, iShowU pipes the audio to the audio device that was selected as your default output before you checked the "record computer audio" option, so that you can hear what's going on.