Milo can understand emotional signals. Peter said himself he didn't understand the words. I have yet to read any preview where he didn't just mirror the emotion of the "player." Sounds more conducive to a virtual dog than a boy. Animals know when you are happy and sad and even can respond to some words.
"You can never jump away from Conclusions. Getting back is not so easy. That's why we're so terribly crowded here."
Canby - The Phantom Tollbooth







