I'm not aware of any limitation on the 360 that prevents simultaneous use of the hard drive and optical media. It was suggested that the PS3 model of optional installs, where developer selected data (presumably the most seek/latency sensitive) gets copied to the hard disk and the rest of the data gets read from the BR drive was/is the optimal configuration.
My point was that this is already common practice in 360 games when it detects a hard drive. The developer can choose what data gets copied to the hard disk (cache partition) and the rest can be fetched from the DVD. The data maintained within the cache partition although only 2GB, can be managed to be relevant to your progress in the game. The data copied there is persistent between reboots and doesn't need to be re-copied unless overwritten by another game. A developer can also flush the cache to align data on the hard drive a certain way for even greater optimization. Installs are at the mercy of whatever fragmentation level is present. And because the cache is reused, it doesn't matter if you boot 10, 50, or 100 games, have a 20GB, 60GB, or 120GB hard drive; users aren't required to manage space for it.
The whole idea of installs on a console is still a bit foreign to me. I guess on the PS3 there really isn't another way to combat the high seek latency of optical media other than forcing them, but I think swap/cache partitions are still the more elegant solution. Although on the 360, with its DVD size limitations, optionally installing secondary disks on multi-disk titles to avoid disk swapping makes sense.
I understand at a certain user level, (ie. to us here at b3d and me included) that managing disk space, resolution settings, network access, etc. isn't complicated and the fine grain control appreciated. But for Joe Public, a console shouldn't be that complicated. When little Johnny can't play his game because his hard drive is full, and his mom Nancy tries to fix it for him and can't, then you have crossed that line from mass market consumer electronics to hardcore gadget.