SO Shiva..

[Viridiana]

Gee you actually believe that honestly? None of us even know what "Laying with a dragon" actually means

Err. . .no. The phrase "lie with a dragon" has a rather clear meaning. I mean, there's a tiny, tiny chance that it really does just mean that she lay down next to a dragon, but that usage would be phrased differently to avoid just such a confusion. To say that one person lay with another is to say that they had sex, and this is reflected in the reactions of the NPCs to the idea. None of them want to come right out and say it, but you can tell they're trying not to dwell too long on just how a human (or Elezen, I guess) woman manages to have intercourse with a dragon.

She lay down with a dragon--the gravest of all sins, according to the Ishgardian faith. Yet in the eyes of Iceheart's followers, this was a holy act--the blessed union of man and dragon. How such a thing could even be possible is quite another question.

The enemies in SV and SC that transform into dragons are what make me assume that there was some sort of offspring from her union with dragons.

Hmm. . .not quite sure what to make of the transformation. I can see your side, but had you asked me before this patch what I thought of it, I would have said that I thought it was just powerful magic granted to devote believers. It could well be in the same line as how the voidsent in Haukke hard manage to turn normal Wood Wailers into more voidsent.

The dialogue in the game goes out of it's way to say that the one fact about her that is for certain that even her followers believe is that she "lay down with a dragon"

Well, it's well established that everyone believes that. While I'm accepting the story myself, I still see room for it to be the case that the truth really has been entirely lost at this point.

(post limit is annoying)

If you mean the 1,000 character limit, just do what I'm about to do. Type your message in Notepad or something, post a message on the board saying "edit incoming" or something, then copy/paste your message into an edit. Edits bypass the character limit.