You should turn down the volume of the game itself. For example, when I play TF2 with my friends and use Skype I have the game volume turned down quite a bit in the in-game audio settings. That way I can still hear the Skype voices loud and clear while still hearing a low level of in-game volume but not enough to be heard over my mic.

Thats not what i said... I have my mic at arms length away and people can still hear just fine

If you go into the control panel and click on "classic mode" and then click on "sound" you should get a window that comes up where you can manage your speakers and recording devices. Just click on the recording tab and go from there. You might have to actually disable the mic though, so I don't think that would really solve your problem.

im on windows 7 and i cant find the classic mode

Oh sorry, I just upgraded to 7 about a month ago and I'm still used to some old vista lingo. There should be a button that says "view by" in the upper right of the control panel. Just click on that and make sure that it's not sorted by category and you'll be able to find it.

here is the problem in more detail.

as shown in this picture here while watching a Diablo 3 video
http://img195.imageshack.us/img195/8518/helpci.jpg

you can see my mic on the left isnt moving at all but when the video makes noise it makes it like im saying stuff on skype but i am not.

Lol, I don't know what to tell you.