There have been rumors floating around about KotOR III since about a year after Sith Lords came out. The latest boost was in an interview with a representative of LucasArts a year or so ago, in which they listed KotOR as one of the intellectual properties they thought was still viable.
Word is that the basic problem with Sith Lords was that LucasArts started pressuring Obsidian, wanting the game in the stores before the Christmas buying season started. They had to drop a number of plots, including a mission to find the planet that was producing all those knockoff HK-50s (the first clue was supposed to be in the sealed military base under the environmental-control base on Tanis, leading to a world run by an insane AI). There was also supposed to be a more explicit, and dramatic, reveal of the nature of G0T0, and a bit more of a showdown with the Remote on Malachor V.
If a KotOR III is made, one hopes the software company will be given the time they need to complete it. (I've read a number of plot suggestions, but most of them require taking the lead character from one of the last two games and nerfing him/her heavily. I think it'd be a better idea to start with a new graduate of the new Jedi Academy, started by the Lost Jedi that the Exile had gathered together, and set him/her the task of finding out where Revan and the Exile had gone, and whether they needed reinforcements. Finding the trail could involve revisiting a number of planets from previous games, and/or finding new ones. Of course, by the time the Hero finds the others, he/she would be powerful enough to be the reinforcements...)
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