Well, I bought myself a new camera with built-in Mic, one USB cable. Mic is working perfect (mind you - the camera is on the top of the monitor so the mic is around 2 ft. away from me and the other party hears me, well, perfect...with normal voice.
So obviously there is something wrong with this mic jack. As I said, it's annoying having to buy a new camera, however the bright side is that I have one less cable to clutter behind the computer.
Thanks all.