I just found this out, with lack of a webcam for skype and windows live, I wondered if my phone could act as an alternative. And it can! Not sure if older devices are supported or not.
You will need: WiFi, an Android device(preferably up to date), DroidCam app, and Droidcam software for PC.
Your phone must be in WiFi mode, not 3G/4G
Go to the Android Market and search for DroidCam and download the app. It's free but for a version with audio/video capabilities, you have to get the paid version.
Go to http://www.dev47apps.com/ and download the software for your pc. Supported operating systems are Windows and Linux only. Install the software, it should only take a few seconds.
Open the app and wait for the word "idle" to display at the top right.
Open the Droidcam program from pc and a small window for configuration will appear.
In the space where it says "Phone IP" type in what is displayed in your phone's screen. It should be in the upper right hand corner.
Port doesn't require change.
Done! Now go open Skype or Windows Live to see if it works in Tools > Whatever video settings. Set your webcam to Droidcam.
Windows Live may require you to exit and re-open it.
Hopefully this will work for everyone without any problems.