I finallly got everything hooked up in eclipse to debug and see how the internals of hibernate work. I hooked up core, annotations, entitymanager, and jpa.

My problem occurs with jpa. when I step into it, the first thing I DO NOT see is it loading the persistence.xml file at all. Instead it is loading some PersistenceProvider.class in META-INF/services. Here is the code in Persistence.class.....(notice that there is no code that loads the persistence.xml but when I am using binary, it loads my persistence.xml file and Map properties allow me to override values....do I have the wrong source version from hibernate SVN or something????

public static EntityManagerFactory createEntityManagerFactory(String persistenceUnitName, Map properties) {
EntityManagerFactory emf = null;

if ( providers.size() == 0 ) {
findAllProviders();
}
for ( PersistenceProvider provider : providers ) {
emf = provider.createEntityManagerFactory( persistenceUnitName, properties );
if ( emf != null ) break;
}
if ( emf == null ) {
throw new PersistenceException( "No Persistence provider for EntityManager named " + persistenceUnitName );
}
return emf;
}

// Helper methods

private static void findAllProviders() {
try {
ClassLoader loader = Thread.currentThread().getContextClassLoader();
Enumeration<URL> resources = loader.getResources( "META-INF/services/" + PersistenceProvider.class.getName() );
Set<String> names = new HashSet<String>();
while ( resources.hasMoreElements() ) {
URL url = resources.nextElement();
InputStream is = url.openStream();
try {
names.addAll( providerNamesFromReader( new BufferedReader( new InputStreamReader( is ) ) ) );
}
finally {
is.close();
}
}
for ( String s : names ) {
Class providerClass = loader.loadClass( s );
providers.add( (PersistenceProvider) providerClass.newInstance() );
}
}
catch (IOException e) {
throw new PersistenceException( e );
}
catch (InstantiationException e) {
throw new PersistenceException( e );
}
catch (IllegalAccessException e) {
throw new PersistenceException( e );
}
catch (ClassNotFoundException e) {
throw new PersistenceException( e );
}
}

Do you use eclipse? And/or Maven?

Our persistence.xml was here and did not work well within eclipse and Maven:
/src/main/java/META-INF/persistence.xml

Now are persistence.xml is here and it works fine (eclipse and Maven):
/src/main/resources/META-INF/persistence.xml

Actually, /src/main/resources/META-INF/, is the place where it should be from a Maven perspective.

actually, no, that's not why. I finally figured it out(too bad I can't get my credit back :( ). Anyways, if you look closely at the code above, it is loading a file from META-INF/services/" + PersistenceProvider.class.getName(). When you have hibernate source in your path and entitymgr in your path, etc. et., this file is not in the path anymore. If you use the hibernate binaries, it is in one of the jars. This file contains a single name of the Hibernate PersistenceProvider. That then loads the persistence.xml file. This is why it was not loading my persistence.xml file...it still had not loaded a PersistenceProvider.

Thanks a lot erikvaningen!
It works for me =)