I was able to swap my main display to the non-display linked monitor, and photo booth and other programs started to work. I swapped it back, and had the same issue.

I am using a MBP, 15", 2.66 i7 with 8G ram running lion. I had the same issue where after the lion upgrade my isight camera would not function correctly when using the displaylink.

Thanks for the bug report. Unfortunately it is not a driver issue. These applications are trying to use OpenGL acceleration on the DisplayLink screen even if the DisplayLink screen doesn't support it.
We submitted a bug to Apple both for the iPhoto and the FaceTime/iSight issue.