Woo hoo! I fixed it! I can't believe it! I will tell you what I did...
I right clicked on one my mp3's and picked "edit file type"
I noticed for Application Preference Order "Xmms" was first and "Listen to music files" was second. I tried switching them making "listen to music files" and it worked. Yesssss!
After closer inspection, I have determined "Listen to music files" runs "soundwrapper xmms". So I guess that program has to be run first for xmms to work right.