The "mute" switch on iPad now works exactly like the mute switch on iPhone.
It only silences Alerts and Notification noises. The Human Interface Guidelines say that Games should also obey the mute switch - but some don't.
Music (iPod App), and Video will continue to play audio even if the mute switch is active. This let's you listen to music while playing a game for example. The justification is that muting silences "interrupting" noises, not "intentional" sound.
Now all of the iDevices work the same way in regards to the operation of that switch.