Okay, lots of confusion in this thread, as if the issue of Hide in Plain Sight wasn't already confusing enough.
There are two "types" of Hide in Plain Sight. The Ranger's Hide in Plain Sight is an Extraordinary (non-magical) ability:
SRD (Classes) said:
Hide in Plain Sight (Ex): While in any sort of natural terrain, a ranger of 17th level or higher can use the Hide skill even while being observed.
Note that the description of this ability only states that he can hide while being observed. It doesn't negate the other requirements of being able to hide, e.g. you must have cover or concealment.
The Shadowdancer's Hide in Plain Sight is a Supernatural (magical) ability:
SRD (Prestige Classes) said:
Hide in Plain Sight (Su): A shadowdancer can use the Hide skill even while being observed. As long as she is within 10 feet of some sort of shadow, a shadowdancer can hide herself from view in the open without anything to actually hide behind. She cannot, however, hide in her own shadow.
The first line of the ability description is similar to that of the ranger's, except that it is not limited to natural terrain only. In any kind of terrain, a shadowdancer can hide while being observed.
The second line of the ability description goes one step further. As long as she is within 10 feet of some kind of shadow (not her own) a shadowdancer can even hide without the need for cover or concealment. A common misperception is that the shadowdancer must be hiding in a shadow, or somehow causes a shadow within 10 feet to expand so that she can hide in it. Neither is implied by the ability.
However, the term "some kind of shadow" gives enough trouble. Barring extreme circumstances such as a room with a light source and perfectly smooth floors and ceilings, there is bound to be "some kind of shadow" within 10 feet of a shadowdancer, or she can easily create one by dropping a small object such as a pebble or a caltrop. This effectively means that a shadowdancer can hide anywhere. Some DMs don't like the ability to work that way, and rule that there must be a shadow large enough for the shadowdancer to hide in (although she does not necessarily have to hide in the shadow) - as a rough rule of thumb, there must be a square occupied by a creature or object of the same size or larger than the shadowdancer for her to use this ability.
As for the interaction of the shadowdancer's Hide in Plain Sight and
true seeing, the spell description states:
SRD said:
You confer on the subject the ability to see all things as they actually are. The subject sees through normal and magical darkness, notices secret doors hidden by magic, sees the exact locations of creatures or objects under blur or displacement effects, sees invisible creatures or objects normally, sees through illusions, and sees the true form of polymorphed, changed, or transmuted things. Further, the subject can focus its vision to see into the Ethereal Plane (but not into extradimensional spaces). The range of true seeing conferred is 120 feet.
True seeing, however, does not penetrate solid objects. It in no way confers X-ray vision or its equivalent. It does not negate concealment, including that caused by fog and the like. True seeing does not help the viewer see through mundane disguises, spot creatures who are simply hiding, or notice secret doors hidden by mundane means. In addition, the spell effects cannot be further enhanced with known magic, so one cannot use true seeing through a crystal ball or in conjunction with clairaudience/clairvoyance.
Essentially, those who believe that
true seeing is foiled by Hide in Plain Sight argue that the shadowdancer is "simply hiding", as per the second paragraph of the spell description, and that the spell description does not specifically state that it foils Hide in Plain Sight.
Those who believe that
true seeing foils Hide in Plain Sight argue that a Shadowdancer is "simply hiding" only if she hides behind normal cover or concealment. However, if she does not actually have anything to hide behind, she is using her supernatural ability to Hide in Plain Sight, and while the spell description does not specifically state that it foils Hide in Plain Sight, it seems to defeat magical forms of concealment (e.g. "secret doors hidden by magic") but does not see through non-magical forms of concealment (e.g. "secret doors hidden by mundane means"), except darkness. Since hiding without anything to hide behind is a magical ability,
true seeing should foil it. However, it would give no additional advantage against a shadowdancer "simply hiding" behind normal cover or concealment (except darkness).