http://daringfireball.net/2012/01/iphone_mute_switch_design
I agree with Gruber here.
I regularly and intentionally set my iPhone on mute when I go to bed – because I don’t want to be woken up by a midnight call from someone challenged in the socially acceptable times of communication department.
But I do want to be woken up by my alarm every morning.
The way Apple (and actually any other mobile phone I had in the past) implemented this is the only way it makes sense – edge cases be damned.
In fact I believe the alarm goes off even if the iPhone is switched off completely – I’ll need to test this at some point.