I hope the finished product looks better than this.... I guess I'm the only one who wasn't blown away by the Batman reboot. Let's hope this one is a little better. It will be sans Katie Holmes, who traded in her career (and a role in the sequel) for a life with Cruise.
Color chart for visual comparison. Based on that, you can see it's not faded or saturated, he really is grey.
Considering he's not "acting" at the instant the picture was snapped, I think he looks pretty good. I like the scars at the corners of the mouth; reminiscent of the Nicholson Joker's origin (though I think the Ledger version will be quite different).
Heath Ledger being cast was a big WTF when I first heard it, but seeing how he looks, it's really not too bad! I wish somehow they could use Mark Hamil's voice in the movie though. To me, Mark Hamil IS The Joker.
I've heard the comics they're using for inspiration are "The killing joke", for the origin, the first original creepy Bob Kane appearances for the first meeting with Batman, and the Joker parts of "Dark Knight Returns", for the final showdown.
^ Killing Joke is one of the best Batman GNs ever, so if they are using that as a backstory, I have no problems with it.
It's really hard to tell in this sort of lighting and pose, have you ever seen photos of characters from Star Trek or Star Wars in more natural non-staged lighting? Typically they look terrible. With how deeply shadowed the lighting on a Batman movie will be likely setup you don't want lots of contrast in the makeup.