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Update: Greenberg has since cleared up his previous statement, saying on Twitter that Project Milo is still in development, and it's rather a case that Microsoft don't expect a release this year, than there being no release at all.

Project Milo absolutely continues in development at Lionhead Studios, it is just not a product we plan to bring to market this holiday. The team at Lionhead Studios has always been a center of innovation and will continue to deliver against that charter.

Original Story: Speaking on ABC TV last night, Microsoft's Aaron Greenberg has stated that Lionhead's E3 2009 darling, Milo and Kate, will continue only as a tech demo, missing out on a full Kinect release.

"Last year we unveiled the Project Natal [Kinect] technology, we showed a bunch of technology demos as part of that. And obviously [Milo] is a technology demo that continues to exist, but right now it’s not a game that we’re planning to bring to market."

Except someone forgot to memo Peter Molyneux the news. In a recent interview with CVG, the 'Neux talked up the tech demo game boy sim with his trademark enthusiasm.

"I promise you it is now ten times more amazing than you'd expect it to be from what you saw at [E3 2009], because what I showed in Milo then was just a tech demo," explained Molyneux. "I think every one asked: 'That was pretty fascinating, but what does it all mean?'. It's only when you see it in its entirety and play it that you realise it's robust enough for people to play on their own."

Elsewhere, however, OXM UK was told by Microsoft Game Studios VP Phil Spencer that the Milo and Kate tech went into the impossibly adorable Kinect title, Kinectimals.

"Milo and Kate, the technology is stuff that we're still incubating back in the studios. I think Lionhead has always been a great place, and the nice thing about Peter [Molyneux] as Creative Director in Europe is you start to see some of those ideas around Milo also showing up in other places, so Kinectimals is actually done at Frontier," said Spencer. "But Peter being so close has actually been able to take many of the learnings that Lionhead has done and help other teams, and when you see the interaction between the girl and the animal on stage you can see similarities to stuff we were working on with Milo, so we start with experiments and they may turn into games themselves. We may not have had anything to announce today with Milo but understand that those investments in creative research show up in many places."

So, has Milo and Kate been chopped up and incorporated into Kinectimals, or will we actually see a full game release? Eurogamer contacted Lionhead for some confirmation either way, and got that old "no comment on rumour and speculation" line, so we guess it's a matter of "wait and see" then.