Yeah,
I'm about to upgrade to Snow Leopard in a matter of days, so I'm a little concerned, too.
But, the Apple Forum shows no trouble with Sound output for Snow Leopard upgraders that I can tell.
It may be something particular to our thread starter. But, it does sound like Snow Leopard has a new option for Digital as a checkbox in the System Preferences for Sound. (Or, maybe I've just never seen it in Leopard, since I took a Klipsch GMX-D unit to the living room, and have been using a 2.1 Klipsch unit on the 2009 Mini.)
Or, I did notice someone give advise to a Mini user who was having trouble with their Sound output, not as a result of upgrading to Snow Leopard, saying that inserting the cable or adapter a few times may help cause the internal switch to finally make the connection will help, at times.
So, with all of the cables I have hanging off my Mini, it's not uncommon for me to loose certain cable connections (miniDisplayport and Power, especially) when I disturb the unit. And, again, if there's one of those little 3.5mm adapters to Toslink, it may have become a faulty connection.
Peace to you all,
C. Livingstone