GameSpot is running a story saying that Microsoft has confirmed that their DVD player won't be capable of using progressive scan:

The company would not elaborate on the specific reasons behind the exclusion of progressive-scan, but judging from previous comments from Microsoft executives, the feature was, at one point, under consideration for inclusion in the Xbox. Supported by newer digital high-definition televisions, progressive-scan writes one full frame of video in a single pass--as opposed to the double pass used for the regular interlaced method--which results in a clearer DVD image quality.

The article speculates that cost may have been an issue in the decision. There are several comments attached to the story indicating that the story is old, but this is the first story I've seen that specifically cites Microsoft as a source of the information.