mokee is right in that you need to specify a relative path to access your XML when running locally. You should match this folder structure somewhere on the server as well. However there is often a need to to attach different base paths in front of this relative path to point to specific versions of these folders. For instance we often have several different environments at our agency. dev builds, testing servers, different live environments. Your don't want to have to hard code these in plus you need some way to determine which one is actually being used.
The solution to this problem is often to pass in a basePath as a FlashVar
Take a look at this solution on how to pass a FlashVar into your swf
http://blogs.adobe.com/pdehaan/2006/07/using_flashvars_with_actionscr.html
Set up a flash var pointing to a basePath on your server. Something like
FlashVars="basePath=http://www.yourdomain.com/flash"
Then in the actionscript you can check to see if this basePath exists. If it doesn't, then you know you are running locally, so you use just the relative path you have set up which works locally. If there is a basePath, then prefix this to the front of your relative path and load the xml using this URL.
It is very common to do this and works really well.