So, first off.. I am NOT going to answer any questions reguarding the origins of this, please don't ask, though I would be happy to answer questions about how the demo plays inside of this topic.
Video:http://www.youtube.com/watch?v=Se9e0epAw_k
Anyway, I was able to have a play through with a Sonic Xtreme tech demo, and found some interesting bits.
While it is built on the Nights engine, this runs VERY smoothly at 60 fps, unlike Nights, which is at 30fps. Youtube can't display at 60fps, which is why it looks sorta choppy.
There is no slowdown (not sure if the fact that the playing field is very small comes into play =P)
control could have been better, but this is just an early demo.
I always thought this game was overhyped, and not capable.. But after playing even just this little demo, I am convinced Sonic-Xtreme could have been a contender with Crash, Mario and the likes..