Sonic X-Treme was a Platformer game planned for the Sega Saturn. It was meant to be Sonic the Hedgehog's official jump to 3D, however the game was cancelled after an enormous amount of development troubles.
When the fifth generation of gaming began, 3D gaming became more prominent. With that, many franchises made the transition from 2D to 3D. Some went very well such as Mario with Super Mario 64, while others didn't go well such as Bubsy with Bubsy 3D. Likewise many new mascots joined the Platformer genre with 3D games, such as Crash Bandicoot. With Super Mario 64 being one of the most well known early 3D platformers, Sega fans naturally were eagerly expecting Sonic the Hedgehog to do the jump to 3D as well, however...
Sonic's high-speed platforming proved to be much harder to make in 3D than Sega expected. At first Sonic 3D Blast was released to be Sonic's first 3D game, but the game used isometric view which merely gives the illusion of 3D and it was very poorly received. Sega decided to make a real Sonic 3D game, originally the game was being developed for the Sega 32X add-on, but due to terrible sales and the Sega Saturn being released, they moved the game to the Saturn. Yuji Naka clearly had little faith in the project, as when he was shown a prototype all he said was "Good Luck".
At first the development of the game seemed to be going well, a reveal trailer was shown promising Sonic's jump to 3D. However the developers overestimated the Saturn's capabilities, as when they attempted to run the game in an actual Saturn it simply wouldn't work. This was because the Saturn's 3D capabilities were rather lackluster when compared to the PlayStation and Nintendo 64. Sega of Japan was infuriated by the lack of progress they had done.
Sega attempted to give the team the game engine from Nights Into Dreams to use as starting point to get the game working to run in a Saturn, but when Yuji Naka found out he threatened to quit unless they stopped. The team was split into several smaller teams to build new engines. This predictably only caused more problems, communication between the teams was minimal and the deadline for release was coming soon.
Developers worked for hour and hours non-stop for months. Eventually the enormous amount of stress caused the lead developers to become ill and were told by doctors that they would die in 6 months unless they retired from the project immediately. At this point, Sega gave up and officially cancelled the game.
With the game cancelled, the Sega Saturn was left without a genuine Sonic the Hedgehog game. Sonic 3D Blast was hastily ported to the Saturn and Sonic R was also released, but neither were a true jump to 3D nor an authentic platformer Sonic game. The game's cancellation is frequently considered to be one of the main factors to the Sega Saturn's demise, which was already struggling before the game was even announced.
After Sonic X-treme's cancellation, Sega turned Sonic X-treme into Sonic's Schoolhouse, which included Sonic's sprites from Sonic X-treme.
With Sonic lacking a 3D platformer, many other 3D platformers including Mario quickly gained popularity with little competition from Sega, which also contributed to Sega's declining reputation. Sonic went through a long drought, almost skipping an entire console generation.
Sonic's jump to 3D didn't happen until the release of Sonic Adventure. Some concepts from X-Treme were later used in Sonic Lost World.
Many argue about how Sonic X-treme would've impacted the game market, and whether or not it could have saved the Sega Saturn.