Is there a way to set the Windows 7 desktop wallpaper to an image from a live webcam feed?
In Windows 7, the Active Desktop feature -- which allowed you to set HTML content as your desktop -- has been disabled, so your options are limited.
One method is to set your background to point to a particular directory, and then set the "Change picture every" interval to the minimum of 10 seconds. Then you can use a piece of time lapse software to dump image captures into the folder at regular intervals; Windows watches the directory you set so it will automatically find new images dumped there, and incorporate them into the slideshow. Open source options include chronolapse (for a local webcam) and livedesktop (for a URL-based webcam).
Setting whatever software you use to assign progressive filenames to the images (like timestamps) will ensure that Windows steps through the images in order and does not display old ones; be sure to un-check the "Shuffle" box. You will have to either manually clean out the image dump folder from time to time (or write a script to do so) to ensure that it does not balloon in size if the time lapse software is run for an extended period of time.
Another, more "live" method is to stream the webcam output (from a local webcam or a remote one) to VLC media player and then have VLC play the video directly on the desktop (Video --> Set as Wallpaper).
Are you talking about having a live feed automatically display as the wallpaper? I found this: http://www.wallpapercam.com/ however I have not used it and don't know about it at all. It appears to be subscription/purchase software. Hopefully this helps with that.
Otherwise by right clicking on the desktop, selecting personalize and then Desktop Background you can select any picture on the PC.
Webcam Wallpaper allows to fetch the image from URL every X minutes and optionally stretch it to the desktop:
There are some third party products enabling this, see http://www.google.com/#q=webcam+wallpaper