This certainly isn’t the first time we’ve heard this rumor, but SmartHouse is reporting that Microsoft and Toshiba are working on an updated Xbox 360 with a built-in HD DVD drive. If that were all, we wouldn’t bat an eye — it’s gotta happen sometime — but there are some other, crazier aspects to this version of the rumor that set off some red flags: SmartHouse also claims that the new box will be Toshiba-branded and have dual HDTV tuners, electronic program guide capabilities, built-in wireless networking, and sport an “MP3 player” dock, which we’d imagine would be for a Zune. That’s a hell of a box, right there, and while we’ve seen similar devices like Sony’s PSX, they didn’t exactly take the world by storm. Our money is still on a simple bump of the existing 360 to HD DVD, but get ready to hear a lot of about this rumor in the weeks to come.

[Via Joystiq]

Hmm, I was wondering about that. After all PS3 has Blue-ray!! It was going to happen sooner or later.