Andy Bogard said that he would be going on another training journey at the end of the first anime and his first appearance in this one shows that he has returned to Japan to make himself stronger. When he learns that his brother has been defeated by Krauser, he wants to go and fight him but goes to Germany with Mai to conduct some research about his opponent first. After beating the stuffing out of Laurence, Andy returns to South Town to fight Terry so that one of them will get the opportunity to fight Krauser, and he loses due to Terry using his power geyser attack for the first time. Oh well, at least they got his hair colour right this time round. 
Axel Hawk is a champion boxer who wants to fight Terry Bogard, and he finds him drunk in a bar. After getting one of his students to beat up Tony, Terry snaps out of his depression and decides to fight Axel. Axel punches Terry in the face but he doesn't seem to be hurt at all and Terry then hits him back, but harder, and it knocks Axel out.
Geese Howard was thought to have been killed by Terry in the first anime but it's made clear that he is still alive at the start of this one. He is hiding himself away to heal but his half-brother, Krauser, finds him and wants to know who it was that crippled him. Geese decides to tell him and as Krauser goes off to fight Terry, Geese hatches a plan with Hopper to get rid of his half-brother once and for all. A flashback reveals that a young Geese tried to kill Rudolph, Krauser's father, because he had left Geese's mother to die. He was unsuccessful however due to Krauser stopping him. At the end of the movie, Geese removes the bandage round his eye and starts to laugh as he is happy Krauser has finally been defeated.
Hopper gets a much bigger part to play in the movie although he's still a minor character. He seems to be keeping tabs on Terry and informs Geese when Krauser first beats him, and later on he is seen at the train station having seen Terry depart from South Town. At the near-end of the movie he is on a boat outside Krauser's castle and sees Krauser fall to his death, and he reports this to Geese.There may or may not be a scene where Hooper passes information (possibly about Krauser's whereabouts) to Joe, but I can't confirm this. Blame Wikipedia if it isn't true.
Joe Higashi is the first of the main good characters to find out about Terry's defeat to Krauser and he heads to Japan to tell Andy. He later goes to America and finds Terry and decides that he must go and avenge him by defeating Krauser himself. He tracks Krauser down but his assault goes badly, and when the fight is over he is left with
twenty four broken bones along with other major injuries, although he keeps himself alive and is put into a hospital to start to recover.
Jubei Yamada is a judo master who is also known as "The Demon", although due to his age he isn't quite as good as he used to be. He now lives in his dojo sometimes training Mai and Andy, but when Andy finds out about Krauser, Jubei is the one to fill him in on Krauser's back-story. He tries to prevent Andy from going to fight Krauser but fails when Andy beats him in a fight, leaving him to think that maybe he ought to retire from fighting.
Kim Kaphwan is Korea's taekwondo champion and travels to South Town to find and fight Terry Bogard as he wants to battle against the one who defeated Geese Howard. He does find Terry and the two fight, but Kim is eventually defeated by Terry's sempu-ken attack. After this he thanks Terry for the first and vows to get stronger before he departs to return home to Korea.
Krauser is the 35th Earl of Strolheim and is the world's most powerful fighter. When he learns that Geese Howard, his half-brother, has been defeated, he seeks out the one who did it and finds Terry Bogard in South Town. After defeating Terry, Krauser tells him to come to his castle in Germany if he wants to fight again. Later on Joe challenges Krauser, but Krauser easily defeats him, too. After this Terry does come to Germany and fights Krauser in his own castle, but Krauser is eventually defeated by him, and he kills himself by throwing himself into the sea where he sinks instantly. Several flash-back show his 6 year old and 16 year old self, he's 26 in the anime.
Laurence Blood is Krauser's right hand man and is shown at the start of the anime to be the one who has found out where Geese was hiding. Later on he finds that two people are spying on the castle and he finds one of them, Mai, and gets into a fight with her. He eventually captures her but Andy comes to save the day and uses his Cho Reppa Dan move to send Laurence crashing into a pillar, defeating him. He is not killed however as he appears in the next movie. Like in the games, he carries a sword with him at all times. 
Lily was killed by Geese in the previous anime, but she appears in this one in spirit form to give Terry advice on what he must do, and she asks that if she hadn't have been killed, maybe she could have changed Terry's life and turned him away from the world of fighting.
Mai Shiranui is a female ninja who is desperately in love with Andy, and is over the moon when she finds out that he has returned to Japan. Her mood gets even better when she accompanies him to Germany to find out more about Krauser, but she has a run-in with Laurence Blood. The two fight and Mai manages to burn his face with her Ryu En Bu move but he eventually captures her. Thankfully Andy then comes and defeats him and rescues her. She is last seen in the movie by Joe's bedside after he had been beaten by Krauser.
Rudolph is Krauser's father, and he is already dead but is seen in several flashbacks by Krauser and Geese. He apparently left Geese's mother to die, but didn't seem to care. When Krauser was 6 years old, he beat his son up and told him to become the strongest in the world, and 10 years later his son stood before him to fight. Rudolph believed that whilst his son had gotten stronger, he was still the head of the family and that he could not be defeated. This turned out to be his downfall as he underestimated Krauser, who killed him just seconds later.
Terry Bogard beat Geese Howard and said he was going to make his sempu-kyaku stronger at the end of the first anime, but he's returned to South Town and got a job moving supplies around at the start of this one. After defeating Kim, Terry is about to return home when he meets Krauser, who pulverises him and he is so badly scarred by this defeat that he gives up fighting and turns to drinking instead. It is only through the efforts of Tony that he snaps out of this, and he returns to Germany to find Krauser and defeats him. He then returns Tony to his mother and drives off into the sunset on his motorcycle. His younger self appears in one flashback, and looks like this. 
Tony is Terry's biggest fan and tags along after him. His father, who is only ever seen in a picture Terry looks at, was a street fighter who got himself killed, and now it is down to him to work and earn money as his mother (who is never named) is to weak to work. Whilst Tony is encouraged not to fight, he can't help himself and is shown to be quite strong, managing to beat up three kids who attack him. It is also thanks to him that Terry regained his strength and stopped getting drunk on a daily basis, which leads to him getting the confidence to fight Krauser again.
Tung Fu Rue, like Lily, died in the previous anime but shows up in this one in spirit form before Terry. He gives Terry advice on what he must do which leads to Terry creating his power geyser attack.
