What can cause the volume keys to not work but show the prohibitory sign instead of changing volume? When i try to reduce my mac book volume it suddenly shows that this isn't possible, even the icon in the menu bar is (grey inactive)

This happens sometimes since i installed lion os
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.