mike
your example is true - to load from hdd in the instance when you REQUIRE an asset to render is a bad thing... but only if its required THAT frame. An example of what ACTUALLY happens is this
00 01 02 03 04
05 06 07 08 09
10 11 12 13 14
15 16 17 18 19
20 21 22 23 24
you're in section 18, you have loaded with you (for rendering, AI purposees) sections 12,13,14,17,18,19,22,23,24
you're walking towards section 13, at the point when you cross between 18 and 13 the engine begins its work. You unload sections 22,23,24 and you load up sections 07,08,09. This happens Asynchronousl, meaning without affecting framerate, as and when the sections are loaded the game begins to use them... the only section required for gameplay purposes (by design) is the section you are in so this works fine.
Any alterations made to a section for gameplay progress purposes would be on the saved game currently loaded and thus take affect during the normal load of the game.
... other methods exist but they ALL work ASYNCHRONOUSLY meaning they do not require the game to stop during a load. Only level based (none continuous) games require a level load and even those can be designed/engineered around to minimise the hit.
One large thing that hasn't been mentioned before is this... the HDD will load data at maybe 50MB/s... if they use a really expensive one (unlikely) then that could go up to 100MB/s. Now lets say a section is 50MB of data that needs to be loaded... with good engineering that 50MB would read in a single read (single file) and so take around 1second from HD. DVD speeds would peak at around 17MB/s thus the same read would take about 3 seconds. Lets complicate things (as we are wont to do) and compress the filesystem. This bumps the READ speed of DVD to effectively double the rate (average compression being around 50%) thus we're getting 34 MB/s read speed with a slight delay for decompression (the cpu's are fast enough to decompress at 200MB/s + easily). Now we're seeing a read speed that is comparable to HD speed and all we did was program around the issue.
Now you could say that the same compression could be applied to the HD version (and it more than likely would) however if we designed the engine properly in the first place then the required read speed would be the speed the DVD system offers.
In short the DVD system with a streaming game shouldn't really affect the ability to do streaming worlds nor will it result in pauses. It just requires design and thought... and we're full of thoughts.