There's the iTunes application. There's the iTunes library which is basically a file (library.itl) which contains pointers to the media files themselves wherever you store them (usually on the internal hard drive). Playlists are also kept in this library file.
What are the iTunes library files? - http://support.apple.com/kb/HT1660
More on iTunes library files and what they do - http://en.wikipedia.org/wiki/ITunes#Media_management
Most people just have one library, but you can have multiple libraries, each in its own iTunes folder and each with its own library.itl file which points to media files (where exactly can very but it depends upon how complex you want to be about this -- I have several libraries but some of of the links point to the same file in all). From what you said it sounded like you have two libraries and two iTunes folders, each with its own set of iTunes files and folders. In one you have your high quality and in the other you have your low quality, but it's tricky keeping things straight in both. If I'm wrong here then I'm missing something in your explanation.
Wait, doesn't my library need to be on the device that I create playlists on?
To reiterate, the library file does contain the playlists.
iOS: Syncing with iTunes - http://support.apple.com/kb/ht1386 - You have to either sync everything or selected playlists.