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.

-- 
Microphone Capture ALWAYS muted
https://bugs.launchpad.net/bugs/299642
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