If you play with all of the settings and STILL can't get it to work here is what you need to do...
1.) Uninstall the broken copy.
Find the rpm name by typing "rpm -qa | grep xmms". Once you find that (not the skins or plugins) type "rpm -e xmms-x.x.x" or whatever version you have.
2.) Download and install a new copy.
You can download xmms from http://www.xmms.org/download.html
doubleclick to install it and have fun. I use ogg vorbis, an alternative to mp3 that works just as well http://www.xiph.org/ogg/vorbis/