1. The camera is defective
2. There is a problem with the software.
To check #2, create a new ADMIN account for yourself in System Preferences > Users and Groups. Make sure it is an Admin account.
Log out of the existing account and into the newly created one.
Try the camera now.
Does it work?
If yes, problem solved, if No, assume #1 is correct.
Check any remaining warranty and book a trip to the Apple Store
P
I have a MacBook Pro "Core 2 Duo" 2.4 13" Mid2010
and I have never yet been able to find or use the built in camera. Every time that I try to use Photo Booth it says "there is no connected camera." I would like to be able to use Photo Booth and to Skype. I have been doing some online reading and have tried resetting the System Management Controller (SMC) several times to no avail.
Anybody have any suggestions?

Chowhound
Comic Vine
GameFAQs
GameSpot
Giant Bomb
TechRepublic