Lionhead once again claim that Milo & Kate was scrapped because it was just an experiment and was never supposed to be an actual game but this time also add financial reasons to the story, according to Lionhead Studios’ creative director Gary Carr in an interview with incgamers.com:

Carr explains that Project Milo was never meant to be a “game”, and that it became financially unviable to continue working on the idea.

“When Kinect come about we were really excited to see what we could do with it,” said Carr. “The first thing we tried was Project Milo, which was something in development before we’d even heard of Kinect; it was a traditional controller game. One of Peter [Molyneux]‘s mantra is, “emotion is everything”, so we tried to build this virtual boy.

“That’s when we saw this great partnership with [Kinect] and the microphone it has built into it and it can also see you. We thought we could bring you into the experience even more with this device. We played around with it for a while and it suddenly got a lot of press coverage. But it wasn’t necessarily a game, it was a project , it was an experiment.

“Then we stopped working on it because, to be honest, we needed to start making some money as a studio. Microsoft were very kind to let us beaver away on cool ideas, but it costs a lot of money. So we decided to stop work on that and start on Fable: The Journey.

“We always planned to do a long-form game. As part of the Milo project we built something called Seated Technology that gives you the ability to play a Kinect game sitting down. For [The Journey] to really appeal to a Fable fan, and the core gamer, we needed to come up with technology that allowed you to sit on the sofa or couch. That was key.”

I’m still not convinced this is true (except possibly the financial part) considering they went to the trouble of hiring at least 1 actor, to play Milo, as well as hiring film & TV director John Dower (who happens to be currently working on James Bond: 007 Legends which was rumoured to support Kinect but might just have been a typo by Amazon at the time) who worked on it for 3 years with a team of screenwriters and many of the special effects crew from Avatar & The Adventures Of Tintin: The Secret Of The Unicorn! (The actual movies, not the games.) John Dower seemed to be convinced that Milo & Kate was an actual game judging by how he’s listed it in his credits on his website:

MILO & KATE Groundbreaking game for xbox 360 using Kinect interface. Produced by Lionhead Studios, lead designer Peter Molyneux.  Motion capture, animation
and voice director, character designer and story consultant.

In fact he even includes Milo & Kate on the front page of his website! Plus he presented the following Milo & Kate behind-the-scenes video that features many things not shown in either the E3 or TED Milo & Kate demos:

 

Also, this interview contradicts the reason Peter Molyneux gave about Milo & Kate being cancelled.

Plus there was the “Mega Meshes” demo that was clearly from Milo & Kate as there were recognisable locations from the E3 and TED demos, but there were also locations we hadn’t seen before:

I also found this video which is full of unseen and unfinished scenes:

 

Then there were some of the storyboards that were leaked:

I think there needs to be a “Save Milo & Kate!” campaign, lol!

Source: incgamers.com, John Dower's official website, John Dower's Vimeo Channel, bsugden YouTube Channel, UnseenResurf YouTube Channel, Develop
Thanks to 123KINECT visitor Celso Araujo Fontes for submitting this news!