I fixed this by going into sounds preferences and selecting Headphones in the sound output device menu. Some users have found solutions by resetting PRAM, removing audio preference files, or reinstalling Snow Leopard, though most users continue to see the problem. Upgrading to 10.6.1 did not help ( i am actually not sure if this happened before or after upgrade ) Then i switched to Snow Leopard and it worked for a few days until i put my Mac to sleep and the next day i realized I had this issue. I was on 10.5.8 and my sound was working perfectly. Nothing is working when you try to fix this. When you try to turn the volume up, the logo is grayed out and under the volume there is some sort of a STOP icon. No startup sound, no output devices shown. A lot of people fixed that issue by playing around with sound settings in the pref Panel. Do not worry, this is not a hardware issue as you can hear the sound once you power your mac.

This is because an update screw up your sound controls probably.

Some people lost their audio but they can still hear the start up sound, but no sound afterwards. As Apple Support Discussions user 'MariusPiatek' explains, one issue is: There appears to be two underlying issues with the audio problem. Several users are experiencing an issue with their audio output not showing up, leaving them with no sound and an error message in System Preferences stating, 'No output devices found.' This issue first arose in Mac mini systems, though users with Apple notebooks also report similar symptoms.

No audio output device found