Microsoft storage guru and 'gamer dad' Jason Buffington has a great post on the popular Xbox Dad blog about using WHS with Xbox.
Many folks are probably familiar with Windows Media Center PCs for streaming music and photos. And with the Xbox 360® media extenders, that was an effective solution, if you have one PC in your house. But with several PCs and two consoles, we needed a more centralized solution, which is what the Windows Home Server is for. Now, as a networking/server guy, I have always run a server in my house, but it was admittedly always overkill, and even then, my older servers were never really media or family-friendly.
But the Windows Home Server (WHS) is a true Xbox Dad-styled consumer device. It has a very small form factor (barely wider than a standard 3.5-inch internal hard drive) and it's completely self-contained, not even needing a monitor/keyboard/mouse. I personally bought the HP MediaSmart 470. There are others, all powered by the Windows Home Server platform, but I liked the HP for its modularity, size and that I used to love "real" HP servers (but I digress).
He cites the Windows Home Server documentation on media sharing, as well as the section of the Xbox.com site devoted to connecting your Xbox 360 to Windows Media (including Home Server).