Well, i've done some additional testing based on your recommendations in your post, Taylor. I managed to seriously increase the performance and reduce the first load hitching behavior by quite a bit, even on the most intensive missions. There were several improvements i made. Remember, YMMV. The changes were :
1.) No Active AV/AS Scanners during gameplay
2.) Reduce overall number of services and background programs. This includes killing explorer.exe, which can use up to 80 MB of precious memory. I used a batch file to auto turn off all the services not needed during gameplay. By reducing the number of processes to roughly 16-18 and memory usage of windows to around 170 MB, I freed up enough memory for the game to run much better. This seemed to have the largest effect on the games performance, surprisingly. ( I have 900 MB of ram, around 650 was "available" for the game. I'm using all effects in the mediavps, except for high shockwaves instead of super high. Graphics cards settings : 4x AA and 4x AF. Unusually, these have less of an effect on performance than they do in newer games and they make it look

better. This is probably related to the lower number of polygons in Freespace compared to contemporary games)
3.) I reduced my AGP cards latency using PCI Latency Tool 3.1 from 248 to 64. Many sites and users claim there is a performance gain to be had from doing this, although I did not notice much of one, and I'm still testing this as I'm skeptical as to its' improvement. Implement this at your own risk. The idea behind this is that the AGP device takes too long with such a long latency value, and thus creates a queue for other PCI devices such as the soundcard etc, which drives up CPU usage and lowers performance of the system. I am aware that the AGP is on it's own bus, but these sources insisted that even so, it can effect other devices.
4.) I used refresh force to make sure the refresh rate was at maximum (100hz) this increased the frame rate from 60 frames/sec average to 100 frames/sec average. Vsync was left on so as to avoid tearing (it's really bad with Freespace)
5.) enabled img2dds (see below)
Following the above steps gave me a much smoother ride, and to my surprise, step #2 was the biggest factor. I still have some slight hitching on the first load of textures in a mission but it is nowhere near as bad as it was. It seems main system RAM usage is much more important in this game than I thought.
I also enabled img2dds, as I realized I was being overly nitpicky and critical about the nebula quality loss. It's not as bad as i had thought because you can only notice the difference if you really go looking directly for it. Even the explosions aren't as bad as I thought. I would however, prefer we have a hard set of DDS nebulas rather than leaving the conversion up to the graphics card. I think that they'd probably end up being higher quality that way as the conversion can be done with a dedicated converter that might be better at it than having different graphics cards do it.
To sum up, I recommend following steps 1, 2 and 5 for the majority of users. It is possible to improve performance of the game if you're willing to experiment with your system's configuration.