DIGITI-ah, forget it. This isn't that important a rumor anyway.

How about we get an application that does EVERYTHING, hmm? Have Apple make it, even. Call it Home Control, and it interfaces with your lights, your Nest, and eventually all your appliances. I don't want to be jumping between 20 apps.

I'm with you.  I've been looking into this lately, and was really impressed with Z-Wave stuff, and now I want the Nest which is Zigbee only, but there's not a lot of other good Zigbee stuff out there (blinds, door locks, shades, etc are lacking).  Also there's X-10, which is a bit old, and about 3 or 4 other wired and wireless home automation solutions out there.  Would be nice if there was a way to use whatever you want without worrying about the standard its on.

Would not doubt that Apple has their eye on where things are heading with so many appliance or home use possible. I think this will result in some kind of arrangement with T. Fadell (Nest) to branch off and come up with more ideas with a little help from Apple's imagineers.

Would someone care to explain how this technology works?  I am fascinated that you can use it to adjust the color/tone of your LED bulbs, but how?  Is this technology being used in residential environments? 

Well, that's a bit of an exaggeration. There are plenty of home automation systems that can control any type of lighting, including LED. Indigo from Perceptive Automation, for instance, has had an iOS app that controls INSTEON, Z-Wave, X10, and a bunch of other hardware via their home automation server for the Mac.