Gadget blog Engadget is reporting that Microsoft is infact working on an Xbox 360 system with an internal Blu-ray drive. Apparently the Chinese language Economic Daily News is reporting that Pegatron, an subsidiary of ASUS, has won the order from Microsoft to assemble the Xbox 360 with Blu-ray drive.

This makes sense to me. Microsoft knows that right now the PlayStation 3 is sitting pretty as a very attractive Blu-ray player. They obviously want to grab a piece of that pie and give consumers one less reason to go with a PlayStation 3.

[Source: Engadget]