Hi Paul,
Yes, the Time Capsule works fine as a 'NAS' for the Sonos. The Time Capsule does back ups of my iMac. It is stored as 'sparsebundles' and this is not readable by Sonos. What Sonos instruct is to copy (or move) your itunes folder from your Mac/PC and save it to the Time Capsule as a Music folder. Once this is done (might take a while depending on how much music you have), use the Desktop Controller for Sonos and 'Update Music Index'. Again, this may take a few minutes.
After thats done, you are ready to listen to music! Music lists appear the same on the Sonos controller CR200, iPhone and iPod Touch.
Full instructions are available on the Sonos website, just do a search for 'using Time Capsule with Sonos' in the support section. If you run into problems, just give them a call (freephone to USA!) they are very, very helpful and kind.
What I have on my Time Capsule is my back up (which works fine) and another folder for music now. However, if you want to add more music, then you'll have to manage this manually, i.e. drag and drop the new tracks into the music folder on Time Capsule from you Mac/PC.
Lastly, for others that may read this, the Time Capsule is not really a music server, in the sense that it's not DLNA compliant, or has iTunes servers etc. I think this option with Sonos works, because Sonos made it work!
Hope that helps,
Raihan