Welcome to 2.2 - Read around about the changes so you dont think your phone is &*@$ed up. This is normal (but a dumb change in my opinion).
You probably just have silent mode clicked on in the settings, and therefore it will only go to silent and not vibrate. However when you take it out of silent mode in settings, then you can only go to vibrate. Oh google. What were you thinking..
As others have noted, the new V2.2 eliminates the capability to set phone to "VIBRATE ONLY!" Amazing that such a basic feature, obviously used by so many, would be eliminated in an upgrade designed to make IMPROVEMENTS to the OS!