I've got a Core Duo Mac Mini at home and a Core 2 Duo Mac Mini at work. They're really excellent machines. The home machine spends a lot of its time running Adobe Lightroom, which is fairly IO and CPU intensive, and performance is quite acceptable. (There are moments when the disks get quiet and nothing is happening on the screen, despite the incomplete task at hand. I blame these on bad software engineering rather than on insufficient hardware performance.)

My home Mac Mini replaced a dual G4 tower. It's cheaper, quieter, faster, and smaller.

For disks, I thought about going the NAS route, but decided to do Firewire instead. I bought two LaCie 1.5TB drives (each has 2x750GB striped), with one as my main media drive and the other as a Time Machine backup. It's not as efficient as a ZFS filesystem with snapshots, but it was painless to set up and performance is excellent.

If (and only if) you also need a new monitor, then I'd consider an iMac. For around the same cost as a Mac Mini plus a comparable monitor, you get a slightly faster computer with a much faster graphics engine and a bigger disk. Also, if you want dual monitors, you can do that with an iMac, but you're out of luck with a Mac Mini. If you can find the previous generation (white) iMac, I'd take that in preference to the current metal version. You get a significantly better matte screen, versus the current glossy thing.