iShowU HD Pro and iShowU v1 use a third party driver called Soundflower to record Application Audio. Soundflower is a piece of software that lets us record audio being played from the system.
We'd love it if Apple had made it so that we (as developers) can record audio from an application, or from the computer itself but unfortunately and for whatever reason there is no API to do this.
You can think of Soundflower as a pipe. Whatever goes in one end comes out the other. In this case we're talking about audio. Whatever audio is played to the Soundflower 2ch output appears on the Soundflower 2ch input.
So to record audio, iShowU does the following:
How can I tell if I have Soundflower installed?
If you go into your System Preferences under Sound, it should be present in your Input as well as your Output tabs.
I can't install Soundflower from the application.
Please check out this article