Yes it's possible to do that. I don't know the exact procedure but I have some drivers for it so you can configure it to work with MSN Messenger. Two of my friends have done that with their eyetoys already. I just haven't got round to getting the eyetoy - I was given a Logitech Quickcam Messenger for free so I couldn't be bothered lol
Rumor has it that because of its specification it makes an excellent High Resolution Webcam!
PM me and I'll send you the file with all the drivers - google the topic for detailed instructions on how to set up the webcam!