In an environment where the policy server version is very old and it can only export a smdif file. Is it possible to convert the smdif file into an xml file for use with newer versions?
There is no mechanism to convert a smdif file to the newer xml format.
The Policy server would need to be upgraded from version 6 to 12.52. Then run the import with smobjimport command. Once the smdiff has been imported, you can run the xpsexport command to get the data in the xml format.