4) It is acknowledged that a) the server will need to translated/send
these passwords in plain text, b) integration with other apps may
require password *stored* in plain text. (But please explain if there
is a good reason why this should be the default)



Both Jabber's digest auth mechanism and SASLs DIGEST-MD5 (the best auth
mechanisms we have to date) require both the client and the server to
have access to the plaintext password. Thats enough reason for me.


Agreed, there are technical reasons for having passwords kept in plaintext.

However
* Jabber 1.x at least sends the server administrator a copy of the plain text password when the user registers with the server (if the admin is setup to recieve information)


* The transport passwords could be encrypted with the "main" jabber password as the encryption key, so if you get a transport password it's useless without the jabberd password (on the other hand, getting the jabberd password is reasonably straight forward, if they are in plain text)

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