The alternate ending is a callback to an earlier scene. A moment before Sonny first looks at the Nine Sisters album, Sandy says, "I have this terrific friend, are you interested?" In the alternate ending she says, "Oh, there's my friend! I want you to meet her." She points to the girl Danny's dancing with, whom he spins into Sonny's arms, and it's Kira. Personally, I think this was a much better ending than what we got in the film. Actually, it made more sense for her to sing "Suspended in Time" directly to Sonny rather than to a blue screen too.
I seem to recall reading somewhere (probably the Xanadu Preservation Society) that all this stuff is still sitting in the vaults but because of the cost, Universal doesn't want to be bothered to unearth and transfer it. However, there's really no excuse for the exclusion of "Making Xanadu," which should've been on the original DVD from the '90s. A slightly better quality copy than what's on You Tube can be downloaded from the ONJ Video Archive:
http://www.onjvideos.com/tag/Xanadu
Also of note (and on You Tube) is the "Production Reel," which is a condensed 20 minute version of the movie that was previewed for the press, film and music industries prior to release. There's more snippets of deleted scenes, alternate takes, as well as some radically different music:
https://www.youtube.com/watch?v=ekhm6PHmU5M
Olivia also co-hosted an episode of "The Midnight Special" in which she and The Tubes pantomimed "Dancin'," with a bit of blue-screen trickery that allowed her to appear as all three singers.
https://www.youtube.com/watch?v=wN9oUEVO5JA
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