What can cause the volume keys to not work but show the prohibitory sign instead of changing volume?

I have experienced this issue starting with my new install of Lion. I haven't been able to find the cause of the issue but I do have a quick way to reset the audio system and get back volume control.

Open Activity Monitor (Its in Applications/Utilities)

Make sure it is set to All Processes, look for coreaudiod, click "Quit Process" then "Quit". Wait a few seconds and you should have volume control back.

If your a terminal buff a quick sudo killall coreaudiod should whip it into shape.

The first thing to check is the selected output device in System Preferences. To do that, open System Preferences and click on "Sound".

Next, go through each of the tabs to verify that you don't see any obvious settings. I've seen this before on Snow Leopard, and although I'm now on Lion, I don't think this changed much.

I don't remember what the setting were, but it was fairly obvious to me what to change.

Check inside the headphone jack. Is a red light showing? If so, the MacBook might be trying to output optical audio. Make sure nothing is stuck in there - lint, dust, etc. Plugging in and then removing headphones may also help. If the red light stays, best to bring it in for service.

As you suggested, I cHecked inside the headphone jack and found a red light showing. Plugging in and then removing headphones solved the problem. Thank you for the advice.