Most of the time you get the sound effects in memory, and the music on the DVD.
There is some buffering on the music player so that you don't get drop outs when you access the DVD for data reads.
The XBOX only has 512M of ram, so you have to do something like this.
One of the things that is done a lot (and I hate when they get it wrong) is to try and link the music to the game events.
So if you are wandering through a forest you get Jethro Tull, then when you get attacked by the big bad wolf you hear Metallica.
Which is fine, and can even be useful when you don't know a wolf is coming up behind you but the music has suddenly gone metal.
But when you kick the wolf of a cliff and it's stuck 100 meters away and cannot get to you and the music is still blasting your ears because it's not dead and so you must still be in combat with it, or you are level 129,001 and a wolf only takes a blink of the eye to kill, it's annoying.