The addition of that source material was a boon for God of War and Bluepoint but it caused huge problems for Huelett and his team at Konami in making Silent Hill. "We got all the source code that Konami had on file -- which it turns out wasn't the final release version of the games! D'oh!" says Huelett, "So during debug we didn't just have to deal with the expected 'porting' bugs, but also had to squash some bugs that the original team obviously removed prior to release, but we'd never seen before. A lot of assets such as textures and sound had to be taken out of the compiled game, and that brings with it a host of unique issues, especially taken on top of the tricky coding workarounds at play in the original games. We certainly had our hands full. I think at one point [Silent Hill 3 protagonist] Heather was blue."
I guess it makes Hijinx look a bit better, Konami less so. But I guess after 2 years of development, canceling the project and eating the costs didn't look any more appealing than dealing with the bad publicity.