You may want to try reinstalling PulseAudio via the instructions at http://ubuntuforums.org/showthread.php?t=789578:
1) Backup (and then delete) your previous configuration files:
mkdir ~/pulse-backup && cp -r ~/.pulse ~/.asound* /etc/asound.conf /etc/pulse -t ~/pulse-backup/
rm -r ~/.pulse ~/.asound*
sudo rm /etc/asound.conf
2) Ensure you have the necessary PulseAudio libraries and configuration utilities installed:
sudo apt-get install libasound2-plugins padevchooser libsdl1.2debian-pulseaudio
3) Ensure the evil "libflashsupport" library is not installed:
sudo apt-get remove --purge libflashsupport flashplugin-nonfree-extrasound
4) (Karmic users - please skip this step, it's not necessary).
5) Open the PulseAudio Volume Control application ("pavucontrol", or you can launch "Applications/Sound & Video/PulseAudio Device Chooser" and select Volume Control from this applet's menu). In the Output Devices section you will see a listing of the playback devices available on your system. Right-click on the entry that you desire to be made the default playback device on your system and enable the "Default" checkmark. Similarly, navigate to Input Devices, then right-click on the device you wish to set as your default input device (microphone), and ensure the "Default" setting is checked. Close the application when you're finished.
pulseaudio & pavucontrol
6) Ensure that your sound card's PCM mixer is not muted or set to 0% volume (this appears to be a common bug in Intrepid and Jaunty):
alsamixer -Dhw
The Key step is step 5 where you define what devices are used for input and output. Doing this allowed Skype to work with my hardware.
Thanks for going into this in detail but the issue is not that my Pulseaudio is not working properly. It works, but I have no idea how to configure it to work in the way I need. Currently, when Skype uses Pulseaudio, all output is handled by laptop speakers and all input is handled by laptop internal mic. If I plug my USB phone in, then all output and input is handled by the phone. But I am not able to configure it so that all ringing is handled by laptop speaker but all conversations are handled by USB phone. The problem is that I am not understanding Pulseaudio. – nitbuntu – 2009-12-30T11:33:08.250
I can't seem to find any user-friendly instructions for controlling Pulseaudio. The previous version of Skype was easier to configure sound settings. – nitbuntu – 2009-12-30T11:34:44.113