Wayne,
First up, I think you've done a sterling job with the ALUG library. I haven't made much use of it myself, but that's because my work maintains a very good, up-to-date library of technical publications including recent O'Reilly books which is just far easier for me, personally, to make use of. For that reason, I don't have many technical books of my own either.
I think you're right that the sheer amount of territory that ALUG covers, doesn't really lend itself well to heavy usage of the library, esp. if you no longer make it to as many meets as you have done in the past (and I'm certainly not suggesting you should at feel obliged to turn up more than you want to!), which is a shame as it sounds like the O'Reilly group membership might be of some value.
I think the idea of turning the library software into more of a peer-to-peer arrangement sounds sensible, but it's not going to solve the immediate problem you currently have of a library's worth of books in your spare room. Also, it could still leave the problem of how members swap books, if they don't regularly attend the same meetings. Though, I guess you could work it into the software to specify /where/ the book is currently located as well as who holds it and just leave it to ALUGers to work out the transportation/postage.
Alternatively, you could give away all the books you currently have to anyone on the list who wants them, and then whatever's left to a charity shop, and make the peer-to-peer library a list of books that people own personally, but are happy to lend out, if requested. By that point, though, you are heading into BookCrossing.com territory and I wonder whether it's worth the effort of creating/maintaining a local site for that (unless ppl only feel comfortable trusting local-ish ALUG members that they know?).
Bottom line for me, tho - I don't think I'll be personally making much more use of the library in the near future, and with only living in a flat with three main rooms plus bathroom in total, I don't really have the storage space to take on the role (plus I haven't made it to any Norwich meets at all yet).
Peter.