Mario 128 was a tech demo for the Gamecube shown at Spaceworld 2000. The demo showed 128 Mario’s doing various things like making a big sprite of Mario out of blocks. This was to show off the power of the Gamecube and specifically how much better it was from the N64. The N64 would never be able to render 128 Marios on screen (due to its clock speed).
This tech demo know as “Mario 128” was presented at the SpaceWorld 2000 and started with a 2D Mario, on a huge circular Monopoly board. After a while, various 3D Marios appears from under the big 2D one, until 128 Marios can be see on the screen. Each Mario moved and fulfilled various actions, but they were independent from the others.
In the video below you can see the game’s presentation at SpaceWord 2000. Miyamoto starts with a single Mario of 200-250 polygons (the same amount as in Mario64) and quickly brings 128 Marios on the screen. The bar at the bottom indicates how much processing power is being used. They go through different special effects modes showcasing what the system was be capable of. Some minutes later, a cel-shaded versions of Mario also appear, and after that, all Marios become invisible for a little amount of time.
This was initially rumored to be a sequeal to Super Mario 64, or at least another entry in the Super Mario series and there is some info to back this up. There was a 6 year gap (1996-2003 between Super Mario 64 and Super Mario Sunshine) without a Super Mario game. This leads to the consensus that there was a new Super Mario game being developed at that time, although there isn’t any evidence that Super Mario 64-2 was even being developed for the Gamecube, although there is no doubt that work was done on Super Mario 128 as a Mario game at one point. Shigeru Miyamoto has said that Mario 128 would feature a freshness that was lacking from Mario Sunshine. On November 29th, 2004 IGN made an article where they interviewed Miyamoto and he mentioned Mario 128:
“Mario 128’s status is a bit more questionable, and although mentioned by Miyamoto in the interview, we’re still not sure if the game’s a go on the GameCube. Says Miyamoto with a laugh, “We’re currently in development with Mario 128, which people throughout the world have been wondering about.” The state of the game is in question, though, as Miyamoto continues with: “We’re now at the state of conducting various experiments with Mario, so until a release has been set, we cannot make [the game] public.” 
IGN interviewed Miyamoto yet again on August 21st 2006, just months before the launch of the Wii, and Miyamoto did reference Mario 128:
Next, Mario 128. “We’ve been experimenting all this time,” said Miyamoto about the mysterious title that was originally shown as a GameCube video demo. “Some percentage is included as Mario Galaxy on the Wii.” Miyamoto wouldn’t break down exactly what in Mario Galaxy originated from Mario 128, but did give a few hints. “Mario 128 was a test concept for Mario, so, for instance, the parts in Mario Galaxy where you’re running around on the surface have come from Mario 128.” 
At this point it seems that work on Mario 128 stopped. The last known article on the game was on March 8th, 2007 and the article pretty much confirmed the end of Super Mario 128 yet gave more light on how it influenced other games:
“To wrap the presentation, Miyamoto said that one of the most-asked questions is what happened to Mario 128. Surprisingly, he went on to explain that while it was simply a tech demo showing off the power of the GameCube, it was also a kind of proof of concept that is still influencing design decisions today. First up, it was used as a basis for Pikmin’s many on-screen characters and AI, but more importantly, it is now influencing Super Mario Galaxy’s free-form level design and gameplay.” 
During his keynote speech at the Game Developers Conference 2007, Shigeru Miyamoto revealed what eventually happened to Super Mario 128:
“What happened to Mario 128?” said Miyamoto at the end of his keynote, “most of you already played it…,” then the screen showed that Mario 128 equaled Pikmin.
At this point in time, nothing else has occurred from the project. No roms have been released and no more info on the game was given. It is unknown if the game disc still even exists as it could have been written over or tossed. All we know of the game is the one video on Youtube and the interviews with Miyamoto.
Super Mario 128 was originally used by fans to reference a series of projects by Nintendo to create a sequel to Super Mario 64, but in the end Nintendo just used it to experiment with new technology and ideas to incorporate into later games.
Article by Video Games Incorporated
Thanks to Shoyz, Ducky Wensel andMr. Game for the contribution! Also thanks to MarioWiki and IGN for some informations.