Just in case anyone still cared, here's the story of Half-Life 2: Episode Three as posted by writer Marc Laidlaw (and corrected with the correct names of the characters and locales, which Marc had scrubbed). Click!
I've been out of the loop for a long time, does anyone know why HL2: Episode Three never happened?
I've been out of the loop for a long time, does anyone know why HL2: Episode Three never happened?

And It still seems to not stop some developers who might see opportunities to make more cash by using the episodic method, even though we've seen many of them fail. You would think at this point that there would be enough evidence that it isn't really working and possibly putting more strain on developers, but apparently that's not enough of a deterrent. The Telltale games are perfect for this and they've made their niche. Much easier to build a story that has a beginning and an end and tie each episode into a bigger seasonal arc.
I kid, I kid.