Two of your statements are at odds with one another.
What was the location of the .xml file
C:/Documents and Settings/Username/My Documents/My Music/iTunes
this is the default location for iTunes’ XML and playlist files
Where did you put the .xml file?
From the Slug’s perspective: inside /share/hdd/data/HDD_1_1_1/Music/
From Windows perspective //Lanstorage/HDD_1_1_1/Music/
or the mapped drive N, i.e. N:/Music/
I think this is the root of your problem with respect to the playlist issue. The location of the iTunes .XML file may be in /share/hdd/data/HDD_1_1_1/Music/ from the SLUg’s perspective, but, as far as mt-daapd understands, the files to which the .XML points are all located on a mounted drive — not in a subordinate directory.
The paths in the iTunes .XML file are relative to its location with respect to the the actual music files. If the library directory is located on a mounted drive when generated and the .XML file later moved to a location in the direct path of the music, then it will lose track of the files’ location.