John,

one reason it might pixellate when you use lights: lots of web cams are auto focusing, and changes in light can affect that. Possibly when it changes focus it results in a pixellation (? zatawurd?)

if that's the case there may be a way to disable the autofocus. Docs would say one way or the other.Or there may be blogs written by other webcam users whose main beef is the autofocusing, including instructions for fixin' it.