I removed PulseAudio as it seemed to be in conflict with Skype and VLC but now the volume indicator applet is gone and the action keys won't turn up nor down the volume.
Is there a solution? or Is PulseAudio required for the application indicator?
A significant majority of the sound software in Ubuntu now expects the presence of pulseaudio. There are some historical issues with skype, which may be fixed for some newer skype clients (I've seen many reports that this is the case, but others indicating it isn't, and suspect a continual process of bugfixing by skype). The issue with VLC is known, and expected to have been fixed in the upcoming release of Ubuntu 11.10.
Keeping pulseaudio installed is strongly recommended, for integration with the various audio management applications installed in all flavours of Ubuntu (including indicator-sound), which are configured to use pulseaudio as a backend. If you are affected by issues with integration between pulseaudio and other applications, the easiest workaround is to use pasuspender, for example
Unfortunately, there is no currently safe way to have both working desktop sounds and running skype: if pulseaudio is removed, then skype will bind to ALSA, blocking the binding from other applications (including alerts, etc.). ALSA's dmix plugin is sometimes recommended as a way to work around this, but this then limits hardware support to a subset of that described as "supported" by Ubuntu and runs into other issues with multiple audio interfaces (such as for users who have a separate USB headset for telephony).