(1) Try Apple's "Standalone" suggestions at http://support.apple.com/kb/HT2090
(2) It is also a good idea to try more than one user account. Don't use the "Guest" account. If your Mac only has one account, create a new user account for testing.
(3) External iSights are great webcams, and both of mine still work fine. However, as consumer electronics go, they are all now quite old. It is possible that your iSight is beginning to show its age and may need repair or replacement. You can test your external iSight using the suggestions here: http://www.ralphjohns.co.uk/EZJim/EZJimpage4.html
(4) If your iSight does show possible problems, repairing your external iSight might be more costly than buying a new webcam such as one of these: http://www.mac-compatible-web-cam.com/ (Even if you keep a working external iSight, testing with another external webcam might help you in troubleshooting your problem.)
(5) I note that you post that you are using Mac OS X Lion 10.7.2. (You may want to correct your user profile info that shows "Mac OS X (10.6.7)".)
Properly applying the latest Combo version (currently 10.7.3) can sometimes correct software problems. If you don't already have a favorite Combo Update workflow, here is how I do it:
• Use your Mac's Disk Utility to repair permissions and then
download and apply the latest Combo Update, for Lion OS X,
the current one is at: http://support.apple.com/kb/DL1484
• Repair permissions again immediately following the system restart
that completes the Combo update.
If your troubleshooting shows that your problem is likely caused by a hardware problem, see your Apple Authorized Service Provider. There are no user serviceable parts of iSight.
(6) The "update for the iSight camera" that you mention must be the old iSight Updater 1.0.3 updater. As you noted, this update does not apply to any Mac OS beyond 10.3.9. The "Improved audio performance" fix that it offered is included in all Mac OS X versions 10.4 and beyond, so this update is not necessary for your Lion system.
Message was edited by: EZ Jim
Mac OSX 10.7.3