It's only really in busy areas.

This instance was a battleground, thirty players ported into the same instanced zone.

There is nothing I can do with the router. It connects to my dads PC (bottom floor) while my PC is on the second floor.

It's definatly worse in the most populated city on the game (Ironforge) but can do it just about anywhere, however this is pretty random.

While the ram may not be the whole issue, it certainly can't hurt to upgrade it. If you have more than one slot, you could just get a 512 card to add to the system. Also, it sounds like you are running on the base system card. I had problems running the original Spiderman the Movie game on this rig, using the base mother board card, and, being in a pinch, I bought a 64mb card, and it ran fine. Most times the mother board card is, for lack of a better word, hokey. They put something on the board that will run graphics, but that's just about all. As was mentioned though, connectivity is important, and if you are having issues with that, it should be the first thing you look at.