It's been rumoured, and denied by MS for a while. Well, when I say denied it's more of "We currently have no public plans to produce.... etc".
Pragmaticaly MS I suspect would have liked both HD-DVD and Blu-Ray to beat the bejeezus out of each other and fail, having to buy plastic silver spinning disks to play back media is so 20th century

. I'm sure MS via 360 and Media centre would like nothing more than to set the defacto standard for downloadable HD Video content in much the same way Apple did via iTunes for Audio. They've made a start with 360 Live but I suspect HD-DVD caved and died a little earlier than hoped
Having said that, with the wholsesale backing of Blu-Ray from the movie industry now it's relatively easy for MS to produce an add on Blu-Ray drive. For all the agry bargy about Sony and MS with PS3 and 360 lets not forget in most other other areas they're close partners, the Sony Viao laptops being the most obvious example.
The upshot is despite what the press would like to paint as a picture, MS was a secondary supporter alongside companies like Intel for HD-DVD, the leadership was Toshiba, although of course that doesn't make for such a good story. As such I can't see it being a massive problem for MS to embrace Blu-Ray. Let's face it, MS have already included Blu-Ray support into Vista SP1.
As opposed to a price cut later in the year it wouldn't suprise me if for the holidays period 2008 we see an add on Blu-Ray drive for ~£80 for existing consoles and a mid life facelift for new 360's with the Jasper GPU & CPU die shrinks and the integral DVD drive being replaced by Blu-Ray at the current price (Holy long sentance batman!!!)