Actually, it's far more complicated than that..
The majority of Episode II was intended originally to be included in Episode I, but due to time constraints and a limited budget.. They had to split it into two different Episodes. What's worse is that Episode II was butchered, disjointed, and was pretty much hated by everyone that had been a fan of the Xeno series up to that point.. Episode III was actually akin to something of three-four Episodes worth of content that all got crammed into a single game.. In other words, Episode III was their last ditch effort to tie up loose ends and end things as best they could. Xenogears was actually Episode V in the storyline originally, but going by what we actually ended up with in Episode III.. the continuity wouldn't make any sense even if they COULD have remade Xenogears. The two ultimately became unrelated to one another, which is a terrible shame to be sure..