I'm getting the same issue - it doesn't play anything. BUT, if I take my storage card out (SanDisk 8GB) and soft reset it plays the built in music fine.
I'm intending to try formatting the storage card and copying the music over again via Windows Media Player to see if that fixes the issue.
I had the storage card in my Kaiser until yesterday, and all the music played fine in HTC Audio Manager on there.
There is a thread in the Diamond forum which talks about embedded album art being a potential cause of this problem, but I'm not sure how you work out if the album art is embedded in the mp3 or not.