Skype uses robust encryption that protects its Internet-based phone calls from eavesdroppers. The problem is, if you’re law enforcement and need to conduct a lawful wiretap on a Skype account, you’re out of luck.
Skype’s encryption is end-to-end, and its design includes no provision for a lawful wiretap such as those that are routinely conducted over cellular and landline based phones.
There is no question in my mind that Skype’s encryption is robust. Here is an excellent cryptanalysis (PDF) of the Skype service that was performed by Tom Berson of Anagram Laboratories.
Recent article: Internet Telephone Encryption Stumps German Police
Peter H. Gregory 