File server is used for a central storage of files.
Say you have 4 computers and they are set up on a peer to peer network. You have a catalog of Mp3 songs(or accounting information, or customer information, or presentations or whatever), maybe a 4's gig worth that you and your mates like to listen to at work.
Ok you could put them all on one computer, but that computer would have to be ON to play the songs. Well that's ok, but if your running a desktop it could cause a slowdown with your apps if you are playing songs and everybody else are playing songs on shares. That's 4 files being read from simitaniously by 4 different people, not only the system files for your desktop.
Well that's fine, then you simply put the songs on all the computers on all their harddrives. That solves that, but that's 16 gigs of space just to store 4 gigs worth of information. So what you just buy big HD's for everybody... Then of course when you download a new song and add it to the database, you have to transfer it to all the other computers, too.
If you don't do that, what if one of the computers fail? You loose that information. So you have to do backups. On all 4 computers. You have to again backup the files and now your dealing with 32gigs worth of space for 4 gigs worth of information. Not fun.
Computers are cheap. Get a 400 buck wallmart special. 700mhz computer is more then enough for a active 100MB network. Spend the money instead on big HD's for everybody and get nice SCSI array for it. Buy a UPS for it, stick linux on it so it doesn't crash. ( 😛 )
Now you have a central location to keep track of all your information. You save money, you protect your data from the ocassional Desktop hickups and accidental coffee bombs down the power supply. It's now in a reliable machine, out of the way and then no matter which computer you are using the information is all in one spot. You then only have to backup one machine, so a simple tape drive or DVD burner is all you need.
Plus later when it comes to giving everybody new Desktops or to replace dieing ones you don't have to worry about it. One day they show up to work and have a shiny new box, and everything is were they remember it.
Hope that helps
edit: if your talking about freaks like me, who have a file server in their basements. It's easy. I am a geek and I upgraded my computer, old computer now keeps all my files and my roomates have extra space to store stuff because their HD is small, (7 gig with windows XP)