Skype is getting a major, much-needed upgrade: Skype 4.0. President Josh Silverman calls it the “biggest new release in Skype’s history.” The new software client, which which will be released here in beta tomorrow (for Windows only), takes up the whole screen. Video is front and center.

“Our old UI was purpose-built for voice ,” Silverman tells me. (I put an excerpt from my interview with him up on TalkCrunch, or you can listen to the audio file directly). Now by going full-screen, the functionality can be spread out and made much simpler. It also makes it a better video-chat client. There is a big green “video call” button now. There is picture-in-picture functionality, and you can move the thumbnail around that shows your video.

The peer-to-peer technology ensures good quality video, and there is more space available for text chatting or sending files while the conversation is going. When you do a video chat, it really has the feeling of being in a video chat room. You can also pull in videos from Metacafe and DailyMotion (but not from YouTube). While Skype can handle up to 25 participants on the same call with voice, it is limited to one-to-one video chats at this point. Although, those can be combined with multi-party voice and text chats where everyone else just hears the audio. In comparison, Paltalk can do thousands of simultaneous video chats in a similar room-like environment.

The other major change in Skype 4.0 is that the entire experience is now centered around conversations and managing those conversations, whether those are with groups or individuals. Skype 4.0 lets you import contacts from Outlook, Outlook Express, Hotmail and Yahoo Mail. (No Gmail, another snub to Google).

There are also other improvements, such as automatic detection when you plug in a new headset or if your laptop lacks a built-in microphone. It also has software tools for testing your audio and video quality. All in all, Skype 4.0 is a step forward.

Skype, which is owned by eBay, boasts 309 million registered users and had $126 million in revenues in the first quarter.

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This morning, New York City-based chat company Paltalk is releasing a version of its multi-person video chat service on the Web in beta. Called Paltalk Express, it is a Flash version of the company’s download client. While the front end is Flash/Flex, the back end is built on Paltalk’s proprietary technology, which allows up to thousands of people to participate in a video chat session at the same time. The company will be releasing embeddable widgets in the coming weeks, putting it in competition with Meebo, Tokbox, Userplane, and others.

When you launch Paltalk Express, you choose from any of several thousand “rooms” where chats are occurring. Each room can have just a handful of people, or more than 5,000. A chat the company hosted with William Shatner had 8,000 people in it. You can chat only via text, or if you have a Webcam set up, you can make your video stream available. A video camera icon indicates whether video is available for each participant. To see the video for a particular person, you select that person and drag them to a strip at the top of the screen. Anyone can add text chat, but to talk to everyone via video, you “raise your hand” and the moderator of the room hands you the “mic.”

Paltalk’s download client, which works only on PCs, already boasts 4 million active users a month (active being defined as someone who has logged on in the past 90 days), and hundreds of thousands of those pay an annual or monthly subscription fee ($60 a year or $15 a month). Only subscribers can see other people’s videos. Paltalk has a very active community, with 50,000 to 60,000 people online concurrently in 4,000 or 5,000 rooms at any given time. While this freemium model has worked well for the company so far, it remains to be seen whether people are willing to pay for video chat on the Web—even if it is massive multiperson video chat. If you don’t need to see hundreds of other people in your video chat, other completely free options exist, including Tokbox (for up to six people, and integrated into Meebo), Userplane, and SeeToo (for two people). Also, if you want to text chat with multiple other people while everyone is watching the same video or other piece of online content, there is Meebo Rooms, which has a similar feel to the Paltalk rooms.

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Screening Rooms will launch with content from ManiaTV, Heavy.com, blip.tv, and Rip.tv, but also allow users to upload their own personal videos. Uploaded videos can be publicly or privately screened. Shows repeat on a schedule or are initiated by the person who starts the room. Screening Rooms are available in beta today, but will be opened to everyone later this year.

The service comes with a few hurdles for new users though. The need to download another chat client may prove too cumbersome for some users who aren’t on the platform already and paying for video chat when Skype does it for free will prove a hard sell. However, existing PalTalk users should be happy to watch the latest viral videos and shows while chatting and seeing their friends.

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The new 9.0 client features what they call “SuperIM”, where you can chat with up to nine other people in live video and audio. You view video feeds of your friend’s webcams on a strip running along the top of the window, like the one above. From the strip, you can break out and expand a video feed for a closer look. Such a rich chatting experience may prove hectic for most users used to carrying on multiple conversations, but the ability to switch your focus and audio feed between windows helps control the chaos.

The video quality is great if you shell out the extra $4.99 each month ($59.95/year) for the best version, Paltalk x-treme. The basic version, however, only displays user snapshots, while the second-tier version displays video at about half the frame-rate of x-treme, but for $39.95 per year. There is a good comparison preview here.

Paltalk is known for creating communities out of its four million users (amassed over the past eight years). They have hundreds of chat rooms categorized by topics such as religion, politics, and technology, with subcategories narrowing them down even further. Radio shows like Opie and Anthony use Paltalk to broadcast to a couple thousand fans while they’re on the air, and I expect the same will happen for their guest line-up.

Regular chat rooms on PakTalk can be overstimulating to the unaccustomed user. There are often several IMs at once and music can be blaring from the administrator’s room. You can control some of that by muting audio, ignoring users, sending a personal IM, or raising your hand to talk (similar to Skype Live). If things really get out of hand, users can report abuse through a team of 250 volunteer who police the rooms and respond to complaints.

Amanda Congdon will go live on Paltalk tonight at 8 p.m. Eastern. Everyone who visits the celebrity chat room on Paltalk will get to experience the full video feed for free. See the full schedule here.

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PalTalk operates through a Windows desktop client and has already proven itself very scalable. It uses GAIM to create a consolidated buddy list across AIM, Yahoo Messenger and ICQ. The company says that its 4 million users often have 5,000 chat rooms open at any given time. The largest room they’ve had open at once included 3,000 people. Cringe-radio stars Opie and Anthony use PalTalk for their chat room and regularly interact with between 1 and 2 thousand people at the same time. I asked the people behind PalTalk how that would be logistically feasible and they said there was a lot of hand-raising going on.

Monday’s launch of the social networking system, called People 2.0, will demonstrate the usefulness and feasibility of video chat in social networking, the company hopes. The technology will then be licensed anywhere that groups of people gather online. PalTalk’s technology is currently free to download, with a paid upgrade available but no prices or service level comparison easily discoverable.

The fact that there is no Mac version of PalTalk is a real shame and the company says that is one of their most frequent requests. The particular social networking implementation unveiled Monday is likely to be unimportant in its other features and details, but the company did tell me they were interested in pursuing open identity standards – for whatever that’s worth.

If social networking is really about more than just contacts between individuals and if people do want to connect in real time with a community of interest – then group video chat makes sense to me. Text chat in the social networking world is so anemic right now that I can imagine video chat setting the space on fire. Will people download desktop clients to access the function? Probably. Will they pay for it? Maybe, but licensees may offer it for free as well.