Yeah I've been using my xbox as a media server for a few years now. I've got a 120gb hdd in it but that was easily filled a long time ago. I mainly use my desktop as a server that streams all my divx movies to my xbox in the living room. The only problem is that the xbox isn't fast enough to keep up with h264 content so for all my HD content I just hook my laptop up via vga.
They recently made some progress with the xbox360 kernel which could POSSIBLY let hackers develop xbmc for 360 which would be absolutely amazing...but we'll see how that goes, I can only hope.
check out http://www.xbox-scene.com/
for any news related. Their forums are very informative as well.