Well first we should see if it is a hardware failure. To see if the Mac totally lost it follow these steps:
1. Click on the top left blue Apple and select "About This Mac".
2. When the "About This Mac" window pops up select "More Info ...".
3. The program "System Profiler" will now launch.
4. In the "System Profiler" left hand column highlight "USB".
5. Then look in the right viewing window and see if it sees the iSight is still built-in.
If it is not listed then try to mack it reset by doing the procedure of resetting your Pram. This might mack the machine find the iSight. Please report back to see if it does or not. Good Luck.
I think that you need to update your system's version by clicking Apple's icon on the left top corner. Click "Software Update."
Or, Try this: run your Hardware Test CD that came with your iMac.
You are lucky that your computer has iSight built-in because I dislike the wires in the back of my monitor for iSight. But, it is not that important to me.