Windows Live Mesh didn't support Windows Home Server, although hacks were available to get Mesh client working on the platform. Hopes were that support would be available in the production release, however, Live team's FAQ confirms that Windows XP and WHS v1 willn't be supported by Windows Live Sync. However, Sync will support WHS Vail Preview, as well as subsequent final release;
Q: Why isn't Sync beta supported on Windows XP or Windows Home Server?
A: Given the growing popularity of Windows 7, we made the decision to invest our resources in building latest version of Windows Live Essentials – including new Sync – to enhance Win7 experience. new Essentials includes innovative technology, including HD video file formats that aren't supported on older operating systems such as Windows XP. As such, we made decision not to make this version of Windows Live available for Windows XP. For WHS users, new Sync will work with new version of WHS (code name "Vail") – currently in preview.
More Info: Windows Live Sync FAQ