I have the exact same hardware (Thinkpad X300, running the cat, lspci, and 
arecord commands from the bug description gives me the same output) and the 
exact same issue.
In my own words:
- When "Internal" is selected as the recording source in alsamixer, the "Mute" 
checkbox in Sound Preferences atomatically sets itself.
- When disabling the "Mute" checkbox, the recording source in alsamixer changes 
back to "Mic" automatically.
It is kind of a catch 22. I can't set the internal mic as the source without 
muting it at the same time.

Note that in alsamixer "Mic" = external microphone plug, "Internal" =
the built-in microphone for my system (this way it worked fine under
jaunty).

-- 
[regression] Built-in mic not working after pulse updates on Karmic.  Intel 
82801H (ICH8 Family) sound card.
https://bugs.launchpad.net/bugs/409819
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