FaceTime & Photobooth states Camera not connected on Lion

I had that exact same problem... along with many others. None of my applications were opening properly including mail.

http://support.apple.com/kb/ht3964

This fixed everything for me. Facetime worked right away, photobooth hung once, but when i force closed and restarted it is working beautifully again. (Scroll down to the blue links and select the one applicable for you, in this case it would be "Resetting the SMC on portables with a battery you should not remove on your own")

Let me know if it works!

Sorry, I'm out of ideas. That fixed it for me :-/ That or the near 10 reboots I did from programs hanging.

The SMC reset made my camera work with Facetime on my MacBook. Thanks for the reminder about this.

I am having the same issue. Have reset the SMC and PRAM, and have re-installed Lion, all to to avail.