Spoiler Warning! Spoiler Warning! If I had that air raid siren from the movie/1st game I'd use it to warn of the spoilers here, but I don't so please adhere to the warning if you didn't see the movie yet.
There have been many theories put forth on Silent Hill Heaven and other forums - I will not comment on whether everyone in the film was actually dead or not because there is supporting evidence for both arguments. However, here is an argument that was put forward on Silent Hill Heaven recently (which drew bitter criticism from some). I will elaborate further with my own thoughts.
First, it is important to consider whether or not Alessa did actually have any evil within her - she may have been a good child who never harmed anyone but it seems that she did have some kind of powers at least (remember, in the hospital scene, when she was lying there burned, she appeared to have caused the flowers to die without touching them and hurt Lisa Garland somehow with her mind - yes,the Red Nurse was Lisa Garland). Christabella demands to know why Dahlia will not name Alessa's father, saying she has brought sin amongst the Christian Cult. Of course, this could refer to an illegitimate child as is usually interpreted, but she could also mean something else. On what, I can't explain myself for sure, but remember Alessa's role in SHI - although, the games are different of course. Maybe in the movie, she was brought into existence by a pagan ritual,or the father was someone with supernatural powers - I am just speculating.
Anyway, when Alessa was being burned alive, I noticed that the 'dark Alessa' said "They thought they knew how to cast out evil" - she doesn't deny that Alessa contained something that was evil, although she herself was "a good little girl." Maybe a suggestion that by burning an inocent child, the cult made the 'evil' (if that's what it was) worse instead of being cast out. I don't know what a good solution would have been if something inside of Alessa actually did need purification, but it seems that what was done to her was wrong under any circumstances.
In the hospital of course, the demon (a pagan god, the Devil, part of Alessa's subconscience, or something else) bonds with her in a pact to create the nightmare world in which the inhabitants (at least the cult) are trapped. It seems to me, that neither Alessa, with whatever powers she possessed, nor the demon were strong enough to create such a limbo on their own and it is here that this theory begins to fall into place. Maybe (and this is just theorizing) the demon needed Alessa's powers to create this world of evil and expand it, but as part of the pact (or just because Alessa controlled most of the powers of that world and controlled what actions would be taken) Alessa was to get revenge upon the cult first. Although we do see many of their mutilated bodies all over Silent Hill (particularly at Midwich Elementary School), most discovered that they could take refuge in their church - either the force or nature of their convictions, or their denial about their ultmate fate kept them safe within. If it actually was their faith, then that could prop up the theory that they were at least partially right about Alessa - something unholy was within her and needed to be purified (although they commited a terribly unholy act to try to cast it out instead),and at least the fact that they believed in God protected them. [Iceman might like that part of the theory...
] It depends on how much Christianity you believe this film to possess - it is possible that this film has nothing to do with God and it is simply the unity and strength of their convictions which protects them within their common sanctuary.
Anyway, after about 32 years (it wasn't actually exactly 30, as is often believed, as the fire which destroyed Silent Hill was in November 1974, according to Officer Gucci) thing had to move quicker. Maybe the demon's plans had been delayed too long by Alessa's inability to get the cult members inside of the church. Thus, it would be necessary to create a vessel to allow the demon to enter the church and give Allessa the power to finish her revenge and finally be done with it. Sharon was created, either through...uh...reproduction with the demon (which was not actually a little girl, as that was merely one of its forms) or through some kind of ritual, as in the first game. One hole that was poked in this part of the theory was - how was the demon able to know that the baby that was left at Tolucca Orphanage (i.e. Sharon) would be taken in by a devoted and fiercely loyal mother who would not only make a suitable vessel/trojan horse (and no one even knows what the standards for that would be) but would also decide to go to the town in Sharon's nightmares? I don't have an answer.
But assuming all of this is actually valid, then the plan worked and Alessa was able to get CGI revenge upon the cult. Therefore, she would probably be more receptive to the demon's supposed plans to expand the evil universe which they had created. Thus, Rose served again as a vessel to expand the universe of Silent Hill outside of the town - the demon still needed her and thus would not let her go (remember Dahlia? "Only the Dark One opens and closes the door to Silent Hill."). Also, remember games II and especially IV (which I haven't played myself but already know the plot).
Of course, this is an unfounded theory which is more than likely wrong. As I said, some of this has been put forward before and was atracked by fans who seemed surprisingly upset and angry about it.
Usually, most people see is as a good vs. evil revenge story, with the demon as a character whose main interest is to help Alessa get satisfaction for what was done to her. Maybe this is correct - I don't know.
There are other more conventional theories, but the "everyone is dead" one goes like this. Everyone trapped in Silent Hill has acrtually died - the cult in the fire at the factory next to the Grand Hotel, Cybil Bennet in her motorcycle crash, and Rose when her Jeep left the road and hit some gravel. Anyone else from Silent Hill, Dahlia and the rapist janitor Colin for example, were killed when the fire spread to the coal mines underneath the town and created toxic fumes, smoke, and flash fires. Thus, they are trapped in Purgatory and cannot enter Hell until the Devil and Alessa send them there. Rose is still in the otherworld in the end because, well, she is dead. Although all of this is possible, there are holes in parts of this theory (some are mine and some are floating around the internet):
- There are no bodies to be found of the people that are supposingly dead.
- Rose's Jeep leaving the road barely qualifies as a fatal accident. The airbag isn't even set off, and Officer Gucci tells Chris that the police have found the Jeep Liberty and there is no signs that anyone was hurt at all.
- If the ash-filled Silent Hill is Christian Purgatory, then why is it only in one place and why does it only spread to part of the rest of the world when Rose takes it with her. And why aren't dead people from all over the world who are to go to purgatory ending up here instead of just one cult? And why was Purgatory created in 1974 with the help of a small child? Of course, it could be some kind of non-Christian alternate universe, so the 'dead' theory could revolve around that too.
- Why the hell did Uwe Boll think that he could, or would be allowed to, direct this film instead of Christopher Gans? Well, that actually has nothing to do with the theory but when I read that he had wanted to do this film I shuddered involuntarily. Although at least we would might have had the amusing sight of watching Michael Madsen stumble though his lines while (allegedly) loaded drunk again if Boll went with his earlier casts...
Anyway, I am not trying to be an authority or demand anyone listen to my boring ramblings. This is the kind of great, deep, and symbolic movie which should trigger this kind of discussion amongst interested fans.
In case you are wondering, I too enjoyed the movie quite a bit...:p