I have an ls-xhl so the device is different but maybe this will apply. I have the following folder structure.
Share
Info
Media
Music
Videos
Pictures
Software......
Backup
I set the mediaserver to see Media, not the sub folder music.
whenever I add any media, I tell it to restart the media server. Mine worked fine with the PS3 2.60 firmware as well as the 2.70. If you havn't upgraded your PS3 give that a try. There is a known problem with (seems like all buffalo devices) and their DNLA compliance although my ls-xhl has not given me any problems. Do a search for more info on their progress.