Yes, the mute button is in the correct position. I'm sure we're all smart enough to have flipped that switch several times.
This just happened to me, but to be fair, it's happened before on my first-gen iPhone, and it started for me today before I upgraded to 3.0. I was hoping the 3.0 update would fix it, but, no luck. I had actually used my phone earlier today with no trouble. Then, plugged in a cord to play music in my car. After unplugging the cord, the phone still thinks the headphones are plugged in; there's no sound from the speaker, and when I adjust the phone volume, the display shows "ringer (headphones)" and the volume bar.
Previously when this had happened sporadically, a simple plug-n-unplug of the headset fixed it. Not this time. I still wonder if it's software, or if something mechanical inside the headphone jack is stuck.
I've plugged the headset into the phone several times and removed, with no change. Rebooted, no change. Upgraded to 3.0. The update appeared to go smoothly, but, no change in behavior; the phone still thinks the headset is plugged in. Also of note is that when I plug the headset in and out, the iPod function starts playing, as if I had clicked the mic button on the cord.
I'd love some help, Apple. I often play podcasts through the speaker, and I don't want to carry my headset around for every time I need to take a call. Thanks.