Once money is sent to a Skype contact, that contact is notified directly in the Skype client that money has been sent to them, how much, and by whom. If the recipient doesn't have a PayPal account, they will be asked to establish one before they can take receipt of the funds. Once they establish one though (and once they log into it through the Skype client), then, from that point forward, sent funds are automatically routed to the Skype user's PayPal account (which means they don't need the Skype client to act as intermediary to manage the routing).
For David Berlind's write-up on the Beta Version of Skype 3.2 for Windows, see his post
in ZDNet's TestBed blog.