Where DOES it work?

You mention that it captures good quality images - what software are you using to see this? I have a logitech webcam myself, and it works flawlessly with MSN and Skype in Vista.

I assume you've installed the software that came with the webcam. This is not stricly necessary. What I normally do, is merely install the drivers for the device, and then rely on the application i'm using to interface with it. That way, you dont get any software running in the background, or controlling the webcams functions without you realising it.

I would suggest trying your webcam with MSN. If it works, then you know its a problem with Skype specifically. The webcam software itself is likely to make no difference, these typically control effects, brightness, and have some basic art packages or video editing facilities. So ignore the webcam software, focus on the IM.

Finally, as far as i know, webcams cant be used by two applications at once. So make sure that there is no software running that could have control of the cam. Check in the system tray for hiding icons that might be stealing the cams interupt.

Bin the lot

Switch the control centre off and skype. Then fire up skype, call someone and enable webcam, that should do it. I had this problem with mine briefly. It kept tying itself to Yahoo IM and wouldn't work on skype - judicious start up and running of the varous apps resolved it.