Windows Home Server has the ability to
stream from certain predefined folders using Windows Media Connect 2.0, which is built in. Streaming from other folders is not supported (out of the box; there are third party add-ins and unsupported tweaks that can add more streaming capabilities). If you want to stream to your xBox using built-in functionality you'll probably be limited to the predefined folders.
What I would do: Have two copies of the music etc. One will be local on your (or your wife's) PC, and the other will be a merged library used for streaming only, kept on the server. The merged library could be as simple as two folders under e.g. Music: \\server\Music\husband\etc. and \\server\music\wife\etc. Windows Home Server will still be able to stream any supported file format. You could conceivably move your local music libraries to the server, though I don't think that will be a very satisfying solution (network latency and performance will probably make local use slow), so I think you'd be better off copying them using a tool such as robocopy or SyncToy.
An alternative to this has been proposed as well. The main downside to the alternative is that you'll be using standard file sharing to access the media, not streaming it.
I'm not on the WHS team, I just post a lot. :)
