I don't mind multiple discs for a game...

 I haven't been keeping up on Folklore, so I didn't know it had CGI cutscenes.  Also, as far as I know, Lair uses the in-game engine for it's cutscenes.  FMV =/= CGI.  However, I'm basing this old FMV screenshots from back in June.  The guys on GS thought at the time that this was real-time, because of the 2d hair and the blocky chainmail.  Take a look for yourself:

So, are you sure Lair uses CGI cutscenes?

There's a difference between rendering cutscenes and playing back a video of a cutscene with in game assets.

Could be realtime, could be playback in Lair.

"The italicized part shows the major flaw in the argument against multi-disc games: did people EVER stop tolerating them IN THE FIRST PLACE? We didn't see games flopping that had multiple discs in the 6th gen, we simply saw fewer being made."

I think that with the coming of the DVD generation, people just expected not to have to use so many discs anymore. I was actually shocked when I'd come across a PS2 game with more than one disc. Certainly, multiple discs didn't hurt sales. The Final Fantasy games on the PS1 did phenomenally. However, those games were so linear that the developers could add on as much content as they liked and simply tack on another disc if they needed to. More open-ended games like GTA will be hindered as its developers try to cram it all onto a single disc, producing lower-quality textures, etc. My solution would have been utilizing the hard drive, but Microsoft really shot itself in the foot when it insisted on having both a DVD drive and a harddriveless SKU. What are they going to do? Maybe they'll just have to go back on their word and introduce "Harddrive Required!" games. It wouldn't be the first time a major console maker changed their minds as "the result of extensive research into the entertainment needs and preferences" of consumers. 

Other than compressing audio, textures, and using in game cutscenes instead of FMV I'm not sure there are too many good ways to get around DVD storage limitations. The only one that comes to mind would be maybe give up the 1080p pissing contest with Sony and limit games to 720p with 1080p being upscaled. I'm not sure how much space that would actually save but I am sure someone on this site would be more familiar with any benefits, or not, that would have.

I'm not an expert on laws and regulations in various countries but I think the EU requires games sold in the EU to have all those languages so other than cutting out parts of a game for Europe (as Sony and Nintendo have in the past) I don't think that's going to help much.

The problems with using the hard drive are that not everyone has one, even those that do wouldn't have enough space for that many games (eg, 5GB a game would wipe out a 60GB HDD in no time), and it would cause confusion for many gamers with one disk being a load disk and one being a play disk and perhaps 2 more disk being swap disks for Core owners and so forth.

Although this debate does just show again that Sony and MS jumped too far ahead in console technology. MS tried to do it on the cheap but if you don't go all out on every part of the console then the part you kept cheap will be a weak link limiting the rest (sort of the N64 and Nintendo cutting back the RAM to make it cheaper). On the other hand Sony has discovered that if you do go all out on everything your console is so expensive that few can afford to buy it or make games for it (3DO would be a more extreme example of that). And some silly people blame Nintendo for not sollowing suit.

Yes, it's 3 discs.

I  don't have a prob with multidisk games - but I do think M$ should consider doing some games with the HD-DVD. I know folks won't be thrilled, but it will solve the multidisk prob ...

The 360 needs to put in multi language support for Europe. Sony has always put multi language support, hence the reason it has done well there.

Disc swapping... Meh!!! It is annoying. Like I said before. In the 90's it was cool, it was like man this game is so big it must kick ass and they usually did i.e. ff7 and ff8. Then the ps2 came out and lets say ffx ... it fits on one disc... which was weird, but awesome at the same time. It was good to put the disc in and play and play and play. If one disc got scratches (not that mine do.... but alot of ppl don't value their disc) you were screwed. If it can't be repaired, then your forking out for a whole new game.

Also this is the 21st century. We need to get pass multi disc. Multi disc is a 10yrs ago technology. Blu ray will demonstrate the need for higher capacity. HDD could work but not everyone has the space over time or the internet to patch for updates.

Disc swapping is used when games are too large for a single disc, and currently there is no financially viable alternative for the DVD. Including Blu-ray in the PS3 made it around $200 more expensive, and single-handedly made achieving any kind of widespread "casual" appeal completely impossible, without adding anything much to the gameplay experience in order to win the "hardcore" gamers.

You can spin it whatever way you want, but including BR is one of the worst mistakes in the history of gaming. Using cartridges for the N64 doesn't even come close to this.