mokee is right in that you need to specify a relative path to access your XML when working locally. You must map this folder structure to the server as well. However, it is often necessary to connect different base paths before this relative path to point to specific versions of these folders. For example, we often have several different conditions in our agency. developers testing servers, different live environments. You do not want to hardcode them, plus you need to somehow determine which one is actually used.
The solution to this problem is often passed in basePath as FlashVar
Take a look at this solution on how to pass FlashVar to your swf
http://blogs.adobe.com/pdehaan/2006/07/using_flashvars_with_actionscr.html
Set up a flash version pointing to basePath on your server. Sort of
FlashVars="basePath=http://www.yourdomain.com/flash"
Then in ActionScript you can check if this basePath exists. If this is not the case, then you know that you work locally, so you only use the relative path that you created that works locally. If there is basePath, then prefix this in front of your relative path and load the xml using this url.
Very often this is done and works very well.
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