Alsa Audio Output works fine from terminal, e.g. aplay /usr/share/sounds/alsa/Noise.wav.

But I got to change from default to Alsa Audio Output in vlc. I found it in Tools > Perfernces > Audio > Outputs.

The issue is that when I change it to Alsa, I Loose all sound. When I leave the default I get an annoying Audio delay of about 200ms or 500ms. From what I have found you have to use Alsa Audio Outpu to fix that issue.

Updated 6-26-2011 10:28pm

To fix the Alsa Audio Output:

sudo add-apt-repository ppa:ferramroberto/vlc
sudo apt-get update
sudo apt-get install vlc mozilla-plugin-vlc

then, opened Update Manager, there were 2 updates for vlc there, I installed them and rebooted. Now alsa works fine and audio is in sync with video.