Development has been halted and nineteen contractors have been laid off, the source said, and the development resources will be ploughed into Lionhead's Fable franchise. The tech behind Milo may be cannibalised for a "Fable-themed Kinect game," it's said.
This isn't the first time that Milo's fate has been uncertain. In June, Xbox product director Aaron Greenberg said that "Right now it's not a game that we're planning to bring to market." He later clarified that "Project Milo absolutely continues in development at Lionhead Studios, it is just not a product we plan to bring to market this holiday."
In an interview given by Eurogamer last month, Molyneux remained positive that the virtual boy would see the light of day as a complete retail product, saying "I wouldn't be working on it if I didn't hope that to be true."
Shacknews has contacted Microsoft for comment. The official response received by Eurogamer is, naturally, that "Microsoft does not comment on rumour or speculation."