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You insert the switch so that the pairs of pins that are permanently shorted (1&2, 3&4) are vertical.
If you look at the schematic (http://arduino.cc/en/uploads/Main/ArduinoSeverinoSchematic.png
) you'll see that the 10 uF capacitor (C9) is polarized and the + side goes to ground. Looks like the silkscreen layer shows an un-polarized cap. The ground (+) side of the capacitor is the upper side, near the transistor T1, not the lower side, near the diode D2.