"The issue is - does the core plan on doing what it takes to get DNN to validate? Is it even possible with ASP.net (I know this answer is "Yes")."
Not really. Valid XHTML markup is not possible on ASP.Net 1.1 if Microsoft ASP.Net controls are used without resorting to pre-rendering processing of the HTML using a request filter with regular expressions. This is both tricky and error-prone as the regular expression has to make intelligent decisions about what is rendered HTML and what is not. For example, if the page were displaying a forum post containing an example of bad HTML, the regex would have to be able to discern this and not fix it. Also, use of request filters imposes a serious performance penalty.
So, for all practical purposes, valid XHTML markup is not possible using ASP.Net 1.1.
With ASP.Net 2.0, it's very much possible.
Having a fully XHTML compliant version of DNN would certainly be nice. Getting there is going to require significant effort in fixing existing code while ensuring new code is compliant. While that is a big task, it's not impossible -- just darn complicated. What's even more complicated is ensuring that in achieving this goal we do not break the many thousands of deployed portals with modules from multiple sources. So, while it's nice and important to have DNN emit valid XHTML, we cannot rush to fixing one thing that breaks many other things. XHTML compliance will happen, but it will be a gradual process.
Nik