Update: This fix worked while I had it temporarily plugged into the front IO USB port of my PC. As that's not where I prefer it to live, it stopped working as soon as I put it back into the rear one again... Basically, I had to repeat the process of uninstalling the device and removing the driver like the original post mentioned, and then do my process of rolling back the driver, and hopefully as long as I don't remove the LifeCam from my preferred USB port I won't have a repeat. This is a major pain in terms of convenience though if I'm going to have to do this every time it's unplugged, or worse if it happens every time I restart...
This worked briefly. But when I open the preview, I saw an image briefly. But then it went back under Imaging devices in Device Manager. and the preview output went back to grey
Mine did the same thing, and what I was able to do to correct it was to go to the Imaging Devices > Right Click on Microsoft LifeCam. Choose Properties and go to the Driver tab and then choose Roll Back Driver. It will ask for a reason, say your apps won't work with the current drivers. Then, once it's been rolled back, you will see the LifeCam move to a Cameras category instead of Imaging Device, and you're smooth sailing from there. In the time that I typed this reply, my camera has been staring me in the face, and I've not had the image grey out like it did within a few seconds before with the initial fix.