Are files that were heretofore stored on the Xoom automatically moved to the SD card?
No, files that were already on your Xoom's storage aren't moved anywhere unless you manually choose to move them.
I note I also have a folder named /mnt/external1 (sdcard) directory. Any idea what is what here?
The /sdcard directory is a portion of the Xoom's internal memory that is used as world-writeable storage. Since the Xoom uses MTP, it is not a physically separate partition like it might be on other devices, but it is treated differently than other portions of the internal storage (for example, it is accessible over USB).
/mnt/external1 is the physical microSD card that you inserted into the Xoom. It exists and operates completely independently of the Xoom's internal storage (i.e. /sdcard). If you had any leftover files from your smartphone saved on your microSD card then they will should be in the /mnt/external1 directory.
In other words, putting a microSD card in a Xoom effectively gives it two separate external storage locations.