In this month's EGM, Quarterman says that Rare has begun development of "Killer Instinct 3D," and from his description, it sounds like it confirms what we've all feared since first laying eyes on Perfect Dark 0: the people who made Rare's games good have long since moved on to other endeavors.
Basically, Q-man says the game ditches the traditional one-on-one fighting mechanics of it's predicessors, and features fully 3D arena-based combat. In other words, the gameplay is most likely going to have more in common with "Power Stone" or "Godzilla: DAMM" than the actual KI games. I fully expect to see Rare state "Well, Killer Instinct is old, and we felt like 8-player arena battles with random powerups was the best way to 'take it to the next level,'" just like they did with Banjo 3.
However, anyone who's followed Rare's recent history objectively probably knows the real answer by now-- the Rare that exists today is a shell of it's former self, running primarily on a force known as "intern power." This sure sucks for MS, because not only did they blow 300 million on a gimped developer, but also they really could have used a real exclusive fighting game now that Dead or Alive is sure to go multiplatform-- just like they could have used a real exclusive platform game, since Xbox 360 seems to be the only system without one.