SEGA's digital brand manager for Sonic the Hedgehog 4 has confirmed that only the story has been written for episode 2.
Ken Balough joined the SEGA forums yesterday and was quizzed on the development of future episodes of Sonic 4 and whether the studio would be revising things like the game's questionable physics engine. Currently only the story has been written.
SEGA are evaluating if the next game will be built ground-up, use elements of episode 1's engine or just be a straightforward continuation.
Remember these decisions come with a cost associated to them; so it’s not so cut & dry. But we are hearing you’re [sic] guys concerns.