Yeah local media on the Mini's HDD itself or an external drive. Basically take the network out of the equation and see how things go. A lot of people use the Mini as an HTPC to deliver video to their TV's from over the air broadcast to streaming online content. Some even use Boxee to do that..

The RAM that's available right now will be used by the OS for whatever applications that you run, you can't manually allocate it for a specific purpose.

You might want to install iStat Menus and keep an eye on the RAM usage and if you see it spiking pretty high, an upgrade might ease things out..

Regards