I got this response from Google support:
Originally Posted by craigf
Thank you for your note. We're aware of an issue causing the troubleshooter to incorrectly display 'No music in file' and are working on a fix.
Though the troubleshooter is showing a 'No music in file' message, please double check your Music Beta library to verify whether or not these songs were actually added. If you're encountering this known issue with the troubleshooter, your songs will have successfully been added regardless of the error message shown by the troubleshooter.
If this is not the case, log files would help us investigate further. Your log files can be found at the following location:
C:\Documents and Settings\<account name>\Local Settings\Application Data\Google\MusicManager\MusicManager.log
Once you have your files, please send them as attachments in a reply to this email. I appreciate your assistance.
Hope that helps someone. For me, it's not terribly helpful as I've uninstalled Music Beta from my phone...just cannot handle a 26MB memory loss since the app can't be moved to the SD card.