After some frustration with what I thought were setting issues, Lee B helped me out and it turns out my dual 1/8th inch plug headset wasn't going to work for this. I went to the local Radio Shack and ended up with a Logitec 250 USB headset, and things went MUCH smoother! I figured I'd post the settings here that worked, since they are a little different from Lee's screencast since she's using other software.
(Using a Logitec 250 USB headset)
System prefs : Sound : output and input set to Logitec USB