In trying to fix this very same issue on my girlfriend's 20" Intel iMac, I discovered something interesting:
A. In her case, she had recently purchased a non-powered Hi-Speed USB 2.0 hub that was in the shape and coloring of a ladybug insect. Cute, but I suspected something was amiss as I had plugged in a USB SanDisk flash drive to transfer a file (totally unrelated to this topic but bear with me here...) to her desktop.
Before I could do that, all of a sudden the flash drives' icon disappeared from the desktop and I got the early disconnection warning, yada yada yada...
I had previously tried all the usual steps in trying to fix this iSight problem, ie. deleting the ~/Library/Preferences/com.apple.PhotoBooth.plist file, reinstalling PhotoBooth from the OS X 10.6 app from the OS X Install DVD via Pacifist (which is a GREAT utility BTW!! Highly recommended! )
http://www.charlessoft.com/
In checking the Apple System Profiler to see if the built-in iSight camera was in the USB chain, it was indeed there and so was this external USB 2.0 hub... but the early ejection of the flash drive led me to believe that the hub wasn't getting enough power from the iMac to run the flash drive and the other devices on the chain (which includes the iSight...) so... I ejected the only other device on the hub, an external Western Digital 320GB drive and then physically disconnected the USB 2.0 ladybug hub.
Guess what??
Yup... launched Photo Booth and voilá! A fully working Photo Booth with VIDEO!!
So, that being said, unplug any external USB devices and see if that fixes your particular installation. I suspect also that a POWERED USB 2.0 hub would have avoided this problem altogether.