After Madoka and Homura were unable to find Sayaka's Soul Gem, Kyoko went and found it herself. While she was asleep, Sayaka woke up and began heading home.
There she finds Kyousuke who has written her a song, but when she goes to grab the CD, he sees that her body has rotten and calls her a monster. Kyoko, Madoka and Homura arrive just in time to see Sayaka turn into the witch Oktavia von Seckendorff.
Kyubey explains that when a Magical Girl falls into despair, their Soul Gem goes completely black and turns into a Grief Seed, which generates alot of energy, needed to save the universe from entropy.
They go against the witch in the hopes of bringing Sayaka back, but when it turns out this is impossible, Kyoko sacrifices herself saying she doesn't want Sayaka to be alone.
Surviving the barrier requires playing as Kyoko, because Madoka and Homura simply aren't strong enough. You should buy her Double Thrust so she can rid of the wheels easily. Of course, if you have enough extra stat points, that isn't even necesarry.