The S2HD team disassociated from Retro over a year ago into its own separate project that only took base at Retro if I recall correctly. Pretty much all of the bullshit revolving S2HD right now is because of LOst. He has suddenly "disappeared" from the scene too, which is only adding fuel to the fire. There's really a lot of hard work and dedication put into the project so it's a shame the whole thing is being derailed by one guy and his questionable tactics. They made the right move to boot him from the team.
I don't regularly follow S2HD anyway, but the stuff that they do publish out inspires me a good bit, such as all the nice touches and they added to the original Sonic 2, as well as the character graphics being more true to the box art. It influences me to do similar things in Sonic Zero. The real shame I find is this kind of team effort isn't being put into an original fan game.
I think they should clean up the DRM and keylogger nonsense, have an apologetic re-release, and then let the project die.