First of all its Kojima not Konami. And second of all "joe-blow" happens to be Kojima themselves. Google is your friend.
Where is the source that says the engine was scrapped? Here is the only official quote (from Kojima) that I could find:
"Showing off the new TGS 2006 trailer, Kojima confirmed that all the scenes were created with real-time rendering, similarly to the trailer from last year's TGS. He also mentioned that the Electronic Entertainment Expo trailer from May (also done in real time) will be used as a part of the game's opening sequence when the game is completed. " - Kojima (gamespot source)
Another one:
"We've finally started to figure out the PS3, and we've decided on [MGS4's] game systems," said Kojima. "Back with last year's TGS trailer, we were still trying to learn the PS3's potentials. Now that we've figured out what we want to do, all we have to do now is to create it." - Kojima (gamespot source)
Both of those came from Kojima post E3. Consider that this game is slated to be released this year, and the only words about the games graphics are that "we've finally tapped the potential of the PS3 in relation to last year". I would expect, just by reading those statements, that the graphics were improved over the TGS 2005 trailer (not the other way around). He certainly doesn't give the impression that the engine is still in development. All trailers released thusfar were realtime, and if anything should have been getting better, not worse. Engine re-write? Show me the source of that info.
First, no, it is Konami, Kojima is just one man (if google told you otherwise, it is not your friend), not a group (He has a group - KP exists within Konami). Nobody at Konami has stated the video from 2005 to be actual gameplay footage, only that it is realtime (which it is).
Second of all, I think you're missing my point. I do think the game will look better than the last demonstration did. It's a work in progress after-all. Where the hell you're getting the opposite idea is beyond me.
Third, the original tech shown off in 2005 was in pre-alpha state, which means that it has been worked on continuously since then, hence the statement that the engine has undergone a pretty substantial bit of tinkering, optimisation, and work in general.
Fourth, the 2006 demonstration was indicative of rediculously early, alpha-stage gameplay, the 2005 demonstration was not. The downgrade, visually from 2006 vs 2005, is if anything, only geometric, and a very slight downgrade if any. The downgrade from 2007 vs 2005, again, if anything, will only be geometric(again same as before), to allow for a greater number of characters/objects within the scene. There will be upgrades... It's a work in progress, and I will not be surprised in by the end of 2007 the game looks as good or better than the 06 or 05 footage, but people have to understand that things change - budgetts are worked out and adjustments are made.
Anyway... I've been awake for two days. I need some sleep.