I can now confirm the existence of the Xbox Wiimote clone project and I can tell you the project code name : "Newton" The "Newton" controller's code name is after the physicist Sir Isaac Newton. The internal Microsoft engineering code name is for this controller is "Newton" as in Newtonian Physics relating to gravity, inertia and acceleration.
There is a company called Gyration that makes wireless controllers and is an early innovator in these kind of controllers. Gyration owns a lot of applicable patents for motion-sensing controllers and in 2001 Nintendo hired the company to help them design a motion sensing one handed controller that eventually became the Wiimote. Nintendo is an investor in Gyration but they don't own it. In 2001 Nintendo licensed patents from Gyration and used it to develop the Wii. They are US application patents 5898421 and 5440326 which are about a device tracking human motion and translating it into linear movement of computer graphic images. So Nintendo does not wholly own all the patents involved in the Wiimote. Microsoft is rumored to have licensed patents from Gyration and are using them to develop their motion sensing Wiimote controller. Legally Microsoft is not ripping off Nintendo but rather licensing the technology from the same place that Nintendo got it. For an example the Guitar Hero and Rockband controllers both use the same patent that is owned by Konami that they developed for Guitar Freaks. From what I've learned from internal sources at Microsoft I can collaborate that the Newton project is moving forward and I can believe the time table that it has been in development for a while now and they could get it on the market by winter of 2008. The Newton is also going to use an LED sensor bar that can be powered by the USB ports on the 360, it is going to have an LED sensor on the front accelerometer and gyroscope sensor that can detect tilt and motion, rumble motors, wireless two way data communication with the 360, a built in Microphone for Xbox Live and voice-activated games.