Sounds like there's no ethernet cable plugged into the WAN port on the phone. If your phone has 2 Cat5 plugs on the back, make sure it's plugged into the one labeled SW or Switch. Should be the one directly next to the plug for the handset. Otherwise I'd try another cable, I've had a bad cable cause the Mute button to light up in the past. Swapping patch cords fixed it.
But with the same POE cable my Cisco 7940 is working fine. In this linksys when i insert that POE its not even considering only if i insert the adapter the phone lights are blinking. The thing is either i insert a cable or not the status of the phone is same as it is. Mute light is glowing continuously. And Yes i did insert the cable to switch port not to the PC port.