The AppleTV has a hard drive to allow you to sync it with your iTunes library. This allows for local playback instead of streaming, which is good because wireless networks can be flaky sometimes. You wouldn't want the connection to be intermittent when watching a movie or TV show, that's just frustrating.
It can still stream videos that are not on its hard drive, but you can manually set what gets stored locally. For instance, you just got a new TV show. You can store the entire season on the AppleTV because there is a good likelihood that you'll be watching it in the near future as opposed to TV shows you've already seen. And once you're done watching, you can clear it out to make room for other stuff. But again, you will still have the option to stream those episodes.