Relations between Sega and its various regional offices, particularly Sega of America, have been rather tumultuous throughout the company's history. This is perhaps most notable during the development of Sonic X-treme, where the conflict between the two played a major role in the game's eventual cancellation. Supposedly, some of this conflict originates from the 1990s due to former president Hayao Nakayama's admiration of Sega of America. According to former Sega of America CEO Tom Kalinske:


However, video game journalist Steven L. Kent has made claims to the contrary. According to him, Nakayama essentially bullied the American executives under the belief that the Japanese executives were the ones who made the best decisions. When asked if communication between the two was really that bad, he said:

Sonic X-treme began development in late 1994 under the codename "Sonic Mars", and was planned for the Sega 32X as an isometric side-scroller, but eventually became a full 3D game with a view set on a floating plane. Due to this significant change and the commercial failure of the Sega 32X, the original ideas for Sonic Mars were scrapped and reworked into a Sega Saturn game that would eventually became Sonic X-treme. In 2007, two different sets of early design documents were leaked for the Sonic Mars concept. The first, written by the game's first executive producer and team leader Michael Kosaka, focused on the 3D graphics and notably included elements from the 1993 Sonic the Hedgehog television series (referred to by fans as "Sonic SatAM"), which was airing at the time. The second, written by lead programmer Don Goddard, focused more on how the game combined 3D graphics with 2D sprites, and dropped the SatAM elements.

Ian Flynn had stated on several occasions that, had he been given the go-ahead, he would have liked to incorporate Tiara and Gazebo Boobowski from the cancelled Sonix X-treme into the Archie Sonic comics, which were still ongoing at the time. However, during a Q&A from before the comic's cancellation, he confirmed that they would never appear in the comics, and could not disclose the legal reasons why.

Despite this, prior to Ian joining the team behind the Archie Sonic comics, Tiara did make two cameo appearances: first in issue #134, where she was in the audience as Sonic and Sally broke up, then in issue #138 as a waitress working at Uncle Chuck's diner (note that she has blonde hair and a purple top in this appearance).

There was originally a character in the game called Tiara Boobowski (also known as Tiara Cyberooski), who was created by co-designer Chris Senn to act as a rival and love interest to Sonic. Senn had originally created her as one of the initially planned four playable characters, taking on 2D gameplay similar to past Sonic games. However, due to the team having to focus on bringing together the levels and supporting a basic premise of good against evil, the character's story was changed from being a princess to the daughter of a professor, and was not revisited when the game was cancelled.

Due to the stress involved with the game's production, co-designer Chris Senn actually grew physically ill, stating that he "took on far more than was healthy... and after 2 years I became extremely ill... a nurse told me he thought I had 6 months to live, actually. I lost 25 pounds, was sick all the time, had cramps... and still went in to work... all due to too much stress."

The version of Sonic X-Treme we saw in advertisements was scrapped early in development. The slow and unsatisfactory progress in porting the PC engine code to the Sega Saturn caused arguments, and resulted in the executives intervening and bringing in a third party company, POV, to take over programming duties. From then on, three parties worked on the programming separately: one on the boss stages and two on the main game. On the original programmers' side, good progress was made. But POV had no such luck. Due to a poor presentation made by POV, the President of Sega Japan had already angrily left the building when the team of original main-game programmers arrived. In reaction to the poor presentation, the president demanded that the rest of the game be made like the boss engine, which caused further complications and ultimately the cancellation of the game.