Like in the first part of the game, Merlina is being chased in the game by King Arthur. Arthur traps Merlina with a whole bunch of demons he summoned. Merlina, knowing she is trapped for good, summons Sonic from his world to save Merlina. Sonic, knowing how to defeat enemies, defeats the demons and counters King Arthur. He goes up to him, but Merlina pulls him back and transports Sonic and her away.
Later, in the Misty Lake, Merlina and Sonic find a sword on the stone. Sonic pulls the sword and it turns out to be Caliburn, a talking sword. Suddenly, King Arthur appears and Sonic goes up to King Arthur for a duel.