- Skype's encryption algorithm is not, itself, broken;
- Skype uses a "prediction" algorithm to compress voice streams;
- therefore, words have a specific pattern of bandwidth use (toy example: "techcrunch" spikes around the "-crunch", since you'd expect "-nology");
- bandwidth use of encrypted compressed data is equal to bandwidth use of data that has only been compressed;
- these patterns (which can be detected "through" the encryption) allow fairly good reconstruction of the voice stream.
If you like this kind of thing, Google "ssh keystroke timing attacks", or, more generally, "traffic analysis".