You do not say whether your poor images are only with chat, still pictures, all images, or everything.
(0) Broadband internet is required for good video chat images. If video chat image is your problem, check your broadband speed using http://speedtest.net/ Both UP and DOWN speed is important.
Minimum Speed requirements depend on the kind of video you want to do. See this article.
(1) If your problem is with ALL images from your cam, per http://support.apple.com/kb/HT3097, use good (meaning very bright, single-source) light.
Restart Mac and record a short clip in full sunlight. View the clip inside (not in sunlight) to see the best quality your Mac can give.
The Apple articles above apply whether your camera is called an "iSight" or one of the newer built-in cams that Apple has named "FaceTime" or "FaceTime HD" cameras.
(2) The software you use with your iSight/FaceTime/HD camera controls it. Unless you have added third party software that takes control away, your Mac should be giving you the best possible quality for the conditions existing where you are using the camera.
The ONLY case I know where Apple software lets you control the quality is in QuickTime Player movie recordings. Here is how you can adjust quality for QuickTimeX:
However, even if you have set the quality below Maximum here, other apps like FaceTime, Photo Booth, etc., should still automatically set best quality for the lighting conditions while you are using your camera for video.
(3) If you must take manual control of some of the parameters that are normally set automatically by the software you use to operate your iSight, the best I know is iGlasses:http://www.ecamm.com/mac/iglasses/
Message was edited by: EZ Jim
Mac OSX 10.7.3