The virtual kid lives, but won't hatch on Xboxes this year. The unreal Milo & Kate that lets Xbox users talk and gesture to a virtual boy is still planned for release, despite an earlier report to the contrary.
"Project Milo absolutely continues in development at Lionhead Studios," Microsoft director of project management Aaron Greenberg told Kotaku today. "It is just not a product we plan to bring to market this holiday. The team at Lionhead has always been a center of innovation and will continue to deliver against that charter."
Milo & Kate was unveiled a year ago as a showpiece for Xbox Kinect, then known as Project Natal. Lionhead Studios founder Peter Molyneux heralded the program as a technological breakthrough, a quasi-game experience that could give the user the experience of talking to a real child, via the interface of the Kinect motion/voice/camera sensors and an Xbox 360. We tried it out back then. But it no-showed this year's E3 earlier in June.
Earlier today we reported that Greenberg told Australian television that "right now it's not a game that we're planning to bring to market" — suggesting the project was being kept internally for tests and giggles — but perhaps he just didn't finish his sentence.
UPDATE: And here's a photo of Team Milo hard at work, via Joystiq.