A friend's iPhone stopped functioning correctly when making or receiving calls. When he would call, people on both ends could not hear each other, unless he hit the "Speaker" icon.

I tried resetting all settings and rebooting the phone to no avail. Then during a test call, I hit the volume switch to try to increase the volume. The volume icon that normally appears when you do that had the word Headphones on it, meaning the phone thought it had the headphones attached.

A few minutes of searching brought up the answer: there was lint inside the jack. The fix was to connect and remove a pair of headphones several times to try to clear the debris.

If that doesn't work, read the Apple technote for several other possible solutions.