When a XNA project is compiled/built, the Content project that comes with the template builds all the assets into xnb files, then dumps them into a Content directory.
Is it somehow possible that I could have the game assets compiled into a .dll file instead of the Content folder?
Followup question: Is it possible for the assets to reside in the game project itself instead of having a content project? How would I do that?
Have a look at the following article. It will explain to you how to store your XNB files in a DLL binary.
http://msdn.microsoft.com/en-us/library/ff604975.aspx#ID4E5D
For your second question, no it is not possible. The reason you need to store your assets in the Content project, is because XNA utilizes a “Content Pipeline“, which essentially converts various media into an XNA accessible form.