Shrug of God: Producer Tom Hulett initially introduced the game as being set in an alternate continuity from the rest of the series; he later retracted his statement, instead saying that that might or might not be the case. As for the question of whether Harry's a Living Memory interacting with real people, or the whole adventure is inside Cheryl's mind, his answer is that whatever interpretation the player relates to better is the right one.
It's a bit more complicated than that. Producer Tom Hulett and Director Sam Barlow ultimately stitched together elements of three proposals. The first was a rail shooter called Brahms P.D. that was set to alternate between shooting sections and therapy segments that would alter the story and enemies. The second was Cold Heart, which deemphasized combat and brought in the snow and ice. Finally, Konami had wanted a remake of the first game for years.
Partial list of possible gameplay differences (spoilers ahead!)
If you display an "aggressive" personality (this is mostly determined by the opening questionnaire), Cybil will have a ponytail and a different police outfit. She'll act abrasive to Harry at first, but eventually warms up and apologizes for being so rough on him. Even afterward, she'll still refer to Harry as "Mr. Mason" instead of the default Cybil's "Harry".
If you...to put it bluntly, act horny (you look at sleazy pictures, you say you've cheated on a partner and enjoy role play during sex, you stare at other women's breasts), Cybil will wear a police uniform without a jacket, reminiscent of her original appearance in Silent Hill. Her police shirt is unbuttoned, showing off her cleavage. Cybil's hair is in a bun and she wears a set of stylish sunglasses. Diner 52 will also have soft, pink lighting theme and a half-naked woman cut-out near the entrance. Depending on how friendly you are, she can be mean, or friendly.
Depending on your attitude towards alcohol, the can puzzle in the playground will feature either soda cans or beer cans.
You will first meet Cybil either in Diner 52 or on Levin St., at the house. If you meet her then, her dialog will be completely different, since this will be the first time she meets Harry.
Either the TV repair shop or the clothing store will be unlocked at the beginning of the game.
In addition, the answering machines in both stores have at least 3 variations.
Cybil's and Harry's dialogue when he's being taken to the police station subtly changes depending on Harry's friendliness. For instance, Cybil may or may not talk about her father, may or may not command Harry to stay in the police car when she's gone, and will either ask if Harry writes conspiracy thrillers, romance novels or murder mysteries.
The "Babes in the Wood" messages will end with either the brother's accidental death or suicide.
Also in the cabin where you find the Movable Feast memento, there are a couple boxes of sleeping pills, implying that this is his room and that those are the pills he used to kill himself.
Once inside Midwich School, you'll find a recording of a graduation speech given during prom night. Though similar in general content, one concludes that the future is looking up, while the other says that they've now got nothing to look forward to.
When meeting John, he will either act friendly to you or hostile, depending on how friendly you are. The higher Unfriendly PI you have, the more friendly he will be to you (as you being more friendly means you're being more friendly to Michelle, his girlfriend, which makes him jealous).
In the car with John and Michelle, depending on how you responded in the preceding psych session (the marriage one), John will either break up with Michelle, or Michelle will break up with John. If you come off as being generally supportive of marriage (answering yes to "Do you think marriage can really last?" and "Should a couple stay together for the kids?" and no to "Do you think it's a bad idea to marry young?" and "Do you think sex becomes stale after marriage?"), John will realize that Michelle doesn't love him for who he is and will break up with her. If you act like you're against marriage (answering no to the first two questions and yes to the last two), Michelle will realize her personal happiness is more important than her relationship and will break up with John.
Dahlia's one-word (almost) text message changes based on your PI. If you have Family PI, it will say "Bored". If you have Alcoholic PI, it will say "Thirsty", and if you have Sexual PI, it will say "Horny".
The voicemail you get from Cheryl in the sewers also changes based on your PI. If you have high Family PI, Cheryl will tell you it's not safe. If you have high Unfriendly or Alcoholic PI, she will scream at you to go away, and if you have high Fake PI, she will say she needs you.
The appearance of the Raw Shocks varies based on which PI is the highest. If you have high Sexual PI, they resemble the Bubble Head Nurses from Silent Hill 2.
Your outfit can also change depending on your PI and the answers you give in the psych sessions.
Names of locations can change depending on your PI.
In the school, the poster on the wall of one of the classrooms will change depending on your PI.
The picture that Cybil sends you of Cheryl having her picture taken by the police will also be slightly different depending on your PI.
High Family PI will result in Cheryl meeting Dahlia outside of Dr. K's office as she leaves.
Similarities and references to the original game:
In the opening area, there is a sketchbook on the ground. Examining it will lead Harry to remark that it's not Cheryl's. In the original game, Harry initially tracked Cheryl with pictures from her sketchbook.
In the school, there is a poster on the wall of one of the classrooms. Depending on your PI, the poster may show a picture of Samael, the Final Boss in the Good and Good+ endings in the original game.
The poster may also change to an article about mosquitoes, which goes on and on about reminding the reader to obey God. Recall that the original Silent Hill prominently featured a "God" in its plot...
If you have high Sexual PI, Cybil's look will be similar to her original look (as mentioned above), but altered to look more flirty/sexy.
The toy piano with birds on it is a reference to the piano/bird puzzle in the original game.
Harry (possibly) meets Cybil in a diner, just like in the original game.
In both games (Silent Hill and Silent Hill: Shattered Memories), Cheryl is said to be at the lighthouse, and in both games, that's where Harry finally finds her. However, the circumstances are remarkably different in the remake compared to the original.