well my guess is that your slug is running out of memory.
I assume you created the ./ext3flash file on your stick. So this deactivates swapping.
As workaround just set up a swap file on the NTFS partition. This works fine for me.
The raw file performance should definetly improve, yes. Im also thinking of converting to ext3, but its a lenghty process with a almost full drive 😉
you should see 4-5 instances of mt-daapd.
Yes, the S60mt-daapd script takes care of starting/stopping the daemon, but it doesnt take any params. So if you want to enable debugging output, just edit your S60mt-daapd script in /opt/etc/init.d
Alas, the NTFS should only affect the performance during the scan, and not really for streaming.