DTD vs. XSD I hadn't thought about. I was using the term DTD loosely to mean "how will we structure the XML?"
Whether we need to validate or not, the code that consumes the XML needs to know what to look for, so the structure still needs to be defined IMO.
Your last paragraph basically sums up my feeling on it. We're using XLST heavily, and I've had to learn a few things about it that I'd rather not know. Like for instance: variables are immutable, but you can simulate them by creating a recursive template. Yes, XSLT supports recursion.
One of the main problems with using the cross-references is you can't just define a template and a match criterion. You have to roll your own loops. Total pain in the ass. Plus you have to select all the non-nested values and pass them into the template as parameters.