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This hack is a logical "prequel" to S2K, is what SEGA should have done a long time ago. This hack is not a change of level layouts or anything. It's that what should have been.
I think the main reason Sega did not make Knuckles playable in the first Sonic game via lock-on technology is, obviously, the level design. Watch the TAS of the hack made by JXQ and you will understand what I mean.
It was cause of color scheme, Sonic's colors in the game were linked to many other things, so if you replaced Sonic with Knuckles, you would have to change a lot of stuff to make avoid problems, and I bet they didn't want to do that.
Remember how in Sonic 3 and S3K how knuckles had yellow socks (when not playing as him), it was so he wouldn't ruin the HUD number, score, rings display. Cause of the colors.