I was able to find the answer to this question on another site - http://social.microsoft.com/Forums/en-US/whssoftware/thread/4ce9156d-bb5f-4e1...

Currently, Media Connect on Windows Home Server does not allow new creations of Playlists to be used.  Here is a potential workaround for how to edit the new Playlists and make them usable on your Xbox 360 or other media connect devices.

• Open \\Server\Music
• 
  Create a folder called “Playlist”
• Open Windows Media Player 11 on your Windows Vista or Windows XP computer.
• Click “Now Playing” Tab.  Remove any music that maybe in the “Now Playing” list.
• Drag and drop the music you wish to listen to from \\Server\Music. You can drag and drop single songs, multiple songs, and even folders if you wish, to the “Now Playing” section. 
• Click the “Now Playing” drop down menu that is just above the songs that you dragged and dropped.
• Click “Save Playlist As”
• Save the playlist to \\server\music\playlist
• Close Media Player
• Open “Notepad”
  • In Windows Vista, type “Notepad” in search from the start menu, then hit enter
  • In Windows XP, click run and type “Notepad”, hit enter
• In notepad, open \\server\music\playlist\<playlist file>
• You will need to edit all the file locations because they are incorrect.
  • The lines you will be editing begin with “<media src=”.  An example of this is “<media src="\\SERVER\Music\Joels Music\My band Songs\liverecording.mp3"/>”
• Change \\Server\Music to “..”
  • Example, “<media src=".. \Joels Music\My band Songs\liverecording.mp3"/>” instead of “<media src="\\SERVER\Music\Joels Music\My band Songs\liverecording.mp3"/>”
• You will have to repeat this for each song until all the songs you wish to play from that playlist have been changed.  Then click file and click save.  You should now be able to see your playlist on your Xbox 360.

-HP EX485 MediaSmart Server
- 3 System Drives: 1 Barracuda 7200.11 750gb System Drive &amp; 2 Barracuda 7200.11 1.5tb Drives