You know I find it somewhat disturbing that simply the idea of "forming a close bond with a young boy" leads to thoughts of child molestation or whatever nowadays. Consider that the man and boy relationship has been the subject of a lot of fiction over the years, things like "Huckleberry Finn" or "The Andy Griffith Show" as examples, and there are many more.
In the end though we'll see what happens. Like it or not, I expect there is going to be a whole new level of perversion coming out of this. Milo as a tech demo shows what is possible, I believe there was also a case a while ago that made it clear that hardware manufacturers are actually fairly limited in what they can prevent from being made for their system. There was some dispute over porn movies being released in UMD format for example, and I seem to remember Sony lost that one big time.
Looking at the proliferatin of "dating sims" and "porn games" overseas especially, I think it's inevitably that the "Milo" type technology will be used sexually to add a whole new level to those products. Look at the upcoming "spanking RPG" that we had mentioned here on The Escapist, now imagine someone creating a game based around that where you could spank with the remote like a paddle, snap it like a whip, or thrust it like... well you get the idea.
The Wii didn't see more of this I don't think because it simply wasn't powerful enough to do something like "Milo" (which is the point of the demo) but now that we're there, and we've seen the thoughts, I think it's inevitable where this will be going, even if we don't see much domestic production in the US (imports are probably going to be a booming business however).
I guess is the point is that while where this is going to wind up is painfully obvious, I also find it disturbing that when looking at something as innocent as the demo itself, people's minds automatically go to the gutter as opposed to seeing the other potential and the innocent nature of the demo as well.