What I've used, and had success with, is a program called "Super Webcam", used in combination with the "Flash Media Encoder" recommended by Mogulus.
A lot of searching around before I found Super Webcam, it's free, legally, and doesn't have any watermarks. You can set it to pull video from a section of your screen. The only annoying thing is that the program launches it's homepage in your web browser every time you boot it, but thats a minor irritation compared to some of the other softwares.
I've had success streaming my desktop, retro styled games (Spelunky in particular), and more modern games (Left 4 Dead, for one). I seemed to have problems with running in fullscreen though, and if you have Super Webcam shrink the image from it's actual size down to a smaller output size, there is some color distortion. But, all in all, I've been pleased with it.