Originally code-named "The Dimitri Project" and developed by Lionhead Studios Ltd., Milo and Kate was announced at 2009's E3 as a launch game for Project Natal. The game was not present at E3 2010 in any form, but shortly after, Lionhead Studios assured the press that the game was still in development. Milo and Kate resurfaced at TEDGlobal, where Peter Molyneux gave a demonstration shown through screenshots. However, in September of 2010, news surfaced that the game had indeed been cancelled. Molyneux has cryptically hinted since the game's cancellation that Milo would be returning in some form, with rumors ranging from the cancellation merely being a publicity stunt to the inclusion of Milo as a sidekick in the next Fable game.
Milo and Kate is a simulation in the same vein as titles such as Seaman, Nintendogs, and Hey You, Pikachu!. In it, the game player interacts with a boy called Milo with tone and gesture recognition. At E3 2009, Lionhead demonstrated a player drawing a picture on a real piece of paper and showing it to the camera, with Milo then "taking" the picture from her and producing a virtual piece of paper with an identical drawing on it. Later, Milo threw a pair of goggles to the player and showed her how to put them on, with Peter Molyneux mentioning in interviews that Milo was so lifelike that almost all the playtesters instinctively moved to 'catch' the imaginary thrown goggles. He also said that to discourage deviant behavior towards Milo, the game was programmed not to react in any way to lewd suggestions, not even with sarcasm or jokes.
Later reports indicated that much of the game's demonstration at E3 was staged, though to what extent may never be known.
Most of the information released to the press focused on the interaction between Milo and the player, and on the abilities of the new Kinect hardware, so not a great deal of story information about Milo and Kate was revealed; not even who "Kate" was. The game is about an ordinary little boy named Milo who goes to school and does other normal things. He moves to a new town and learns that another child in his school has gotten a new bike. Milo would like a bike just like it, and the player must help him complete activities and earn enough money to purchase one.