"Isn't it too late to make such a change to the console and still make their holiday 05 launch?"
They haven't yet started production of the final hardware so no. They're just now getting out beta kits, but I just don't see it happening. They seem keen on not taking the same amount of losses on hardware this time around, and putting HD-DVD in the 360, with all the other things they have in it, would just put them back to square one.
"It would be stupid to make an add on HD DVD drive for xbox 360, it would fail hard and be out too late. Plus MS couldn't exactly decide to suddenly make HD-DVD games screwing over all the current Xbox 360 owners."
Why would it be stupid? It's not like a game-system add on. It would just be for those folks who want to play HD-DVD's and not spend $1000 on a player. Besides they could also release a version of the 360 at a higher price with HD-DVD capabilities, instead of an add-on, and as long as games are still on DVD-9's it wouldn't be screwing over anybody.
That's like saying releasing Xbox Live for the Xbox is in add-on. Or releasing a light-gun. Or even better, the original Xbox remote. They're just extras or peripherals that are not required. They wouldn't be releasing HD-DVD for gaming, just for movies.