If you're using an inherited Webcam, you may get lucky and it will work as soon as you connect it. Here is the short way:
Figure 1 shows a problem with integrated Webcams: you have to adjust your whole screen to frame your image. I was sitting tall, too.
Camorama does not support v4l2, which is unfortunate because v4l2 has a lot of improvements and bugfixes over version 1. The Ubuntu forums are full of users asking what the "could not connect to video device (dev/video0)" error message means when they try to use Camorama. One reason is they're using a driver that requires v4l2, or they don't have v4l installed.
On a modern Linux distribution, udev and HAL should detect the Webcam, create /dev/video0 with the correct permissions, owner root and group video, and load the correct kernel module. If you are not in the "video" group, add yourself, then logout and log back in. Run the id command with no options to make sure. Run lsmod to verify that the correct kernel module loaded.