Comment 3 for bug 299642

I had the same problem on another laptop, tried the kmix solution, and it worked for me. I just apt-get'ed kmix, then enabled microphone capture in there.

robzor, maybe before wiping ubuntu you should try
sudo apt-get kubuntu-desktop
have a play around there, see if you can get it working. Since installing the kubuntu desktop, I've found that in gnome although microphone recording stays on mute in the gnome volume manager, when I use an application like Skype, microphone capture automatically unmutes itself and adjusts the sound levels according to how loud I'm talking.