A new Earthworm Jim game was in development for the PSP, but sadly the project was soon cancelled. As we can read on Wikipedia in 2006 Atari announced that they had the rights to bring Earthworm Jim to a portable video game system, with many new elements to be introduced, such as the ability to stop gameplay at any time and dance. On 18 June 2007, PSPFanboy stated on their website that they had contacted Atari and that it had been said that the game had been put on hold, probably due to Atari’s financial difficulties and the sale of the games developer Shiny Entertainment.
From Gamezone there are some more info on the development problem with the Earthworm Jim license:
You see, David Perry, one of the original founders of Shiny Entertainment, was ready to get everything off the ground and revive the lovable worm, but there’s one underlying problem that caused it to reach its inevitable cancellation: royalties.
Earthworm Jim was originally published by Interplay, the often money-troubled company that sold off the entire Fallout franchise to Bethesda Softworks to help combat their debt problems. Back in 2006 though, before the sale of the entire Fallout intellectual property, it was reported that they needed $75 million to complete their Fallout MMO project and just by chance, this Earthworm Jim project was set to start around the same time frame.
So as luck would have it, Interplay was in dire need of money and had no way of paying off owed royalties from years past to Shiny Entertainment that included the television show, toys and much more that sent the worm into the stratosphere of superstardom.
Thus, Interplay, Atari and Shiny Entertainment went to bat and struck out.
Thanks to Gabrielwoj for the contribution!