The VideoLAN Forums

As an example (which fails), a portable .m3u file, with the file locations relative to the location of the .m3u file:
\Mp3\Bob Dylan\08 - Bob Dylan - I'll Be Your Baby Tonight.mp3
\Mp3\Grateful Dead\Live Dead\Dicks Picks\Volume 12\05 - Grateful Dead - Sunshine Daydream.mp3

As a working example:
D:\Mp3\Bob Dylan\08 - Bob Dylan - I'll Be Your Baby Tonight.mp3
D:\Mp3\Grateful Dead\Live Dead\Dicks Picks\Volume 12\05 - Grateful Dead - Sunshine Daydream.mp3

This was already mentioned in another thread. Drive-relative paths are not supported. It is specific to Windows and nobody ever bothered to write the code.