Apparently, Microsoft divisions don't talk amongst themselves very well. As this story shows, they couldn't decide whether to say that the iLoo was a hoax or simply a crappy idea (pun definitely intended).

As for why the concept was flushed, company officials seem to be mum, but I'm sure it has nothing at all to do with being held up to public ridicule like they were - at least among people who have half a clue about technology.