Cheese shows picture with barely colors and some false colors

This bug is missing log files that will aid in diagnosing the problem. From a terminal window please run:

apport-collect 875716

and then change the status of the bug to 'Confirmed'.

If, due to the nature of the issue you have encountered, you are unable to run this command, please add a comment stating that fact and change the bug status to 'Confirmed'.

This change has been made by an automated script, maintained by the Ubuntu Kernel Team.

I have the same problem (as well as the crash on clicking arrows bug reported in other report). I was unable to submit debug information from the "apport-collect 875716" command. Example screenshot attached.

I have the exact same problem, your screenshot looks exactly like what I'm getting. I even tried capturing a photo with cheese, and the resulting image file has most of the colors missing too, it's not just the live video that has the issue.
I also get several these messages repeated when I start cheese from a shell:

(cheese:6237): Gtk-WARNING **: Attempting to add a widget with type GtkImage to a GtkButton, but as a GtkBin subclass a GtkButton can only contain one widget at a time; it already contains a widget of type GtkLabel

(cheese:6237): Gtk-WARNING **: Attempting to add a widget with type GtkHBox to a GtkToggleButton, but as a GtkBin subclass a GtkToggleButton can only contain one widget at a time; it already contains a widget of type GtkLabel

AlsaVersion: Advanced Linux Sound Architecture Driver Version 1.0.24.
ApportVersion: 1.23-0ubuntu3
Architecture: amd64
ArecordDevices:
 **** List of CAPTURE Hardware Devices ****
 card 0: PCH [HDA Intel PCH], device 0: STAC92xx Analog [STAC92xx Analog]
   Subdevices: 1/1
   Subdevice #0: subdevice #0
AudioDevicesInUse:
 USER PID ACCESS COMMAND
 /dev/snd/controlC1: sjuul 1852 F.... pulseaudio
 /dev/snd/controlC0: sjuul 1852 F.... pulseaudio
 /dev/snd/pcmC0D0p: sjuul 1852 F...m pulseaudio
CRDA: Error: [Errno 2] No such file or directory
Card0.Amixer.info:
 Card hw:0 'PCH'/'HDA Intel PCH at 0xe6760000 irq 44'
   Mixer name : 'IDT 92HD90BXX'
   Components : 'HDA:111d76e7,10280493,00100102'
   Controls : 15
   Simple ctrls : 10
Card1.Amixer.info:
 Card hw:1 'NVidia'/'HDA NVidia at 0xe5080000 irq 17'
   Mixer name : 'Nvidia GPU 1c HDMI/DP'
   Components : 'HDA:10de001c,10280493,00100100'
   Controls : 4
   Simple ctrls : 1
Card1.Amixer.values:
 Simple mixer control 'IEC958',0
   Capabilities: pswitch pswitch-joined penum
   Playback channels: Mono
   Mono: Playback [on]
DistroRelease: Ubuntu 11.10
HibernationDevice: RESUME=UUID=a5961485-3ee9-4f16-be65-cd545693b3dc
InstallationMedia: Ubuntu 11.04 "Natty Narwhal" - Release amd64 (20110427.1)
MachineType: Dell Inc. Latitude E6420
NonfreeKernelModules: nvidia
Package: linux (not installed)
ProcEnviron:
 LANGUAGE=en_US:en
 PATH=(custom, user)
 LANG=en_GB.UTF-8
 SHELL=/bin/bash
ProcKernelCmdLine: BOOT_IMAGE=/boot/vmlinuz-3.0.0-12-generic root=UUID=62cbc940-4835-4742-911c-b75ebe30a29d ro quiet splash vt.handoff=7
ProcVersionSignature: Ubuntu 3.0.0-12.20-generic 3.0.4
RelatedPackageVersions:
 linux-restricted-modules-3.0.0-12-generic N/A
 linux-backports-modules-3.0.0-12-generic N/A
 linux-firmware 1.60
StagingDrivers: mei
Tags: oneiric running-unity staging
Uname: Linux 3.0.0-12-generic x86_64
UpgradeStatus: Upgraded to oneiric on 2011-10-14 (3 days ago)
UserGroups: adm admin cdrom dialout dip fax floppy fuse lpadmin plugdev sambashare tape video
dmi.bios.date: 05/24/2011
dmi.bios.vendor: Dell Inc.
dmi.bios.version: A05
dmi.board.name: 032T9K
dmi.board.vendor: Dell Inc.
dmi.board.version: A01
dmi.chassis.type: 9
dmi.chassis.vendor: Dell Inc.
dmi.modalias: dmi:bvnDellInc.:bvrA05:bd05/24/2011:svnDellInc.:pnLatitudeE6420:pvr01:rvnDellInc.:rn032T9K:rvrA01:cvnDellInc.:ct9:cvr:
dmi.product.name: Latitude E6420
dmi.product.version: 01
dmi.sys.vendor: Dell Inc.

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Yes, my picture looks exactly the same way as zpon's one.

I am also suffering from bug 843431, so I rolled my kernel back to Natty. The Natty kernel fixes all audio issues, but video from the webcam is still terrible. This is a regression from 11.04.