It doesn't seem far fetched to me at all that the xbox team would be experimenting with BluRay. They would be stupid not to. There is really no reason that microsoft couldn't release an xbox with internal BluRay as a premium offering, but the HD-DVD addon drive was too slow for games, so Microsoft went with DVD and that could be a problem with the lower cost BluRay drives as well. I would love to see a BluRay addon for my Xbox because my PS3 cannot be controlled with my universal remote. If they do release one, I want to see better DVD deinterlacing too. I don't care about scaling, any TV can do that pretty well.
BTW, this article criticizing the BluRay rumor is also nothing more than link bait, but anything HDM gets the comments flowing so whatever...