Many Skypers want to record conversation, turn them into podcasts etc. Most of these solutions work. For the most part you hear yourself talking when recording. This solution is no different. I find it distracting. It is why we went to such lengths to make it work just like it was a normal conversation in SkypeCasting.

I'm writing though to add my "It works!" story, in the hope that it might help someone else to accomplish the same thing.

My setup is very simple -- WinXP, Skype 1.0, i-Sound and a headset that plugs into the computer's sound card (i.e. non-USB). It doesn't seem to matter in what order I start the programs, start the recording or whatever, unlike some methods described here.

In Control Panel-->Sounds and Audio-->Audio tab:
-- I clicked the Volume button, and removed the checkmark next to Mute in the Microphone section.

In Skype, under File-->Options-->Hand/Headsets tab:
-- I had to remove the checkmark from "Enable automating sound device settings adjustment", because otherwise Skype automatically re-inserted the above checkmark (that mutes the microphone) every time I started or ended a call.

In i-Sound, under Settings-->Mixer:
-- I chose "Stereo Mix" as the recording source, and ticked the "Mixer Lock" box. Skype Forum

The same result can be achieve with Audacity which is free. Julian Bond wrote up the instructions for this method.