The sleuths over at the Steam Powered Users Forum have uncovered some interesting information about cancelled Valve game Teebo and Kai. It seems that Valve was collaborating with Escape Factory on the project, which looks like a kid-oriented PC game (possibly a platformer). The game appears to have been cancelled circa late 2002 — probably for the best, considering the effort Valve was pouring into the development of Half-Life 2 at that time.
Anyway, these screenshots seem to indicate that the game was fairly far along before the plug was pulled. This further cements my theory that Valve scraps more content than most other companies ever produce.
Between this, Stars of Blood, and that fairy game, it makes you wonder just what other interesting projects has Valve Software killed over the years?