Droppingin,
Based on your earlier post, it looks like the all the files, including the the iTunes Music Library.xml file are stored on the NAS. That file contains a bunch of information about the music in your library, including the location of the files (which may actually reside in different locations if you don't keep your library consolidated) as well as much of the meta data (such as artist, title, genre, bit rate, play count, etc.). It does this because reading each file individually and parsing each file to extract the ID3 tag data is a time consuming process. If it had to do that every time it launched, it would take a very long time for large libraries. So usually this process is done once when you first use iTunes (or sometimes upgrade), then incrementally as changes are made (e.g. adding new music, incrementing play count, editing album names, etc.).
The problem with sharing the .xml file between multiple instances of iTunes comes not when the file is read, but when it needs to be updated by two different instances of iTunes. Each instance of iTunes will read that file into memory when it launches. If one instance of iTunes makes a change to that file on the shared network drive, the other instance of iTunes will not see that change because it has already loaded the contents of the .xml file into memory. Unless Apple has developed iTunes to check whether that file has been modified since it was loaded into memory (which I have no reason to believe it has, though I have not verified this), any changes made by that second instance of iTunes would overwrite the changes made by the first. You would need to quit that second instance of iTunes and then re-open it for it to pick up the original changes. This also becomes dangerous if the two instances of iTunes try to update the file at the same time, which may lead to file corruption. This wouldn't necessarily be the end of the world; it would probably just require having iTunes rebuild the library file again. That said, if you do not use two instances of iTunes simulateously, you should be fine with this set-up.
Getting back on topic, that set-up is not what this thread is about. This thread concerns the Home Sharing or Library Sharing feature of iTunes. iTunes has the ability to act as a server on your local network in order to share the contents of your library available to other instances of iTunes on the network. This is sharing at a different level of abstraction (sharing music and playlists versus files) and therefore uses a different network protocol than whatever network file system protocol your NAS uses (e.g. SMB, AFP, NFS, etc.). Some NAS devices are capable of mimicking the behavior of the official iTunes sharing capabilities, though often to a limited extent (e.g. streaming only (no copy), limited playlist support, no playcount updating). The advantage, though, is that you don't need to have another computer up and running iTunes in order to have your music collection shared. Most NAS devices that support this function are relatively inexpensive, low power, and running all the time anyway.
If your NAS does not support the iTunes server functionality, or if you do not have it enabled, you will not see it listed in the Shared list. Based on your screen shots, it looks like it is supported.
This thread is how iTunes 10.5 stopped functioning properly with the iTunes server implementations on many NAS devices. The NAS's iTunes server is listed under the Sharing section of iTunes but fails to properly list the music on that NAS when selected. Some people were able to upgrade their firmware on their NAS to fix the issue from that end. For some, the NAS is old enough and no longer supported with firmware upgrades or one just hasn't been provided by the manufacturer. For those of us in that camp, 10.5.1 and 10.6 restored that functionality. For others, functionality still hasn't been restored.
