Just to let everyone know what happened:
Caught the parents after a practice and asked if I could speak with them. Sat down with them and explained my concerns...Dad said he not only understood, but that he was a former high school basketball coach and had a policy that he would not keep a player who he knew was leaving if it meant getting rid of another "keepable" player who would presumably stick around.
They offered to remove their son from consideration from the team and I asked them not to do that as I was still wrestling with the decision. They agreed but said they would understand if that was the reason he did not make the team.
As I've said all along, I would not want to cut a kid in favor of a kid who I KNEW would be back. We essentially had 5 Freshmen who we simply believed did not have the grades/attitude/intensity/ability/dedication to make the team or help us in the near future, or most likely in the years down the road. But we had two other kids who were close to taking the last spot (along with the "transfer" kid)...
Well, Bubble Player 1 turned up with 30 demerits for something he says he didn't do. He is appealing this allegation, but until that time he is unable to participate in any extracurricular activity. Pretty much made that choice for me.
The other player, quite unfortunately, was playing pick-up basketball and broke his ankle. He's in a cast and then a brace for about the next 6-8 weeks, ending his season. He's been invited to come out and be with the team to help out in whatever capacity he can.
In the end, as I'd hoped, it all worked out. We've kept a decent player who will be with us for this year and move on to our sister school next year. We will see if those other two players (and/or any of the other players who didn't make it) improve by next year and get another shot. Thanks again for everyone's input.