I just wanna follow up for those of us that couldn't get this working.
As I stated before I could see my playlists on my 360 but once I got in game, I could only see the playlists on my HDD.
Well, I deleted them after Adam said that the game looks for the HDD FIRST. So I deleted them, and BOOM, it looked at my CPU since there was nothing on the HDD as far as playlists go.
Works like a charm now!
And dam it was worth the wait.
So if you're in my boat, try deleting the playlists on your HDD if you can live w/out them.