Ryu and Ken convince their young tour guide, Chun Li, to follow them to the Devil's Battle Cage in Kowloon Palace. Once there, Ryu enters the illegal martial arts tournament, easily defeating all his rivals, much to the chagrin of the Palace's boss, who orders to kill them on sight.

Ryu, Ken, and Chun Li fight their way out of Kowloon Palace, defeating all the foes they encounter. They almost get out of the infamous area, when boss Lean unleashes his two henchmen, Sodom and Gomorrah, to stop them from escaping. Ryu and Ken defeat them, only to find Lean has Chun Li held hostage. Chun Li's father Dorai, who is a policeman, shoots Lean in the hand just as he is about to fire at Ryu and Ken. All of them safely return to the boy's hotel, where Chun Li says she will take them to go see the martial arts master-turned-actor Fei Long next morning.

Ryu, Ken, and Chun Li visit Fei Long, who is filming a movie. The young actor picks Ken as a sparring partner for his next action scene, stating that "fights have to be real". Fei Long and Ken engage in a hard battle all over the set, only to be stopped by the film director when Ken hits Fei Long in the face, worrying about the actor's wellbeing.

Ryu, Ken, and Chun Li go shopping at a shopping mall. Once there, Ryu meets a strange old man who seems to be about to die. The old man insists on the boy taking him somewhere private, where he could use his ki to get his health back. Fascinated, Ryu follows the old man who teaches him about Master Daruma and his Hadou technique.

Evil drug cartel Ashura sets up a plan to kill Dorai, using Chun Li as bait. When Ashura's henchmen try to kidnap the girl, though, their plan falls apart, due to Chun Li's resistance and Ryu and Ken's intervention. The three then go to the family dojo to stop another Ashura attempt at Dorai's life, which is successfully foiled with the help of Fei Long.

Ryu and Ken decide to go to Thailand in hopes of learning Muay Thai. Once at Bangkok airport, Ashura's boss Donu plants some heroine in Ryu's backpack, who is then arrested and sent to prison. Here he endures brutal torture from Warden Nuchi and taunting from other prisoners, eventually coming to confront Sagat, a disgraced Muay Thai champion. Meanwhile, Ken does what he can to free Ryu from prison.

Sagat and Ryu battle each other in the prison courtyard, ending the fight in a draw. Sagat calls the fight off, realizing he and Ryu are kindred spirits and tells him that he also ended up in prison because of Ashura. Meanwhile, Ken tries and fails to capture Donu after a car chase, but manages to free Ryu from prison. Both Ryu and Ken are being served an expulsion decree, and must leave the country in 24 hours.

Ryu and Ken go to Ashura's secret hideout building, where they manage to defeat and capture Donu and his henchmen, bringing them to the police's custody. After this, they barely escape an attempt on their life, which prompts them to follow the killer to another Ashura's hideout in the forest, led by Zochi. Meanwhile, Dorai reaches Bangkok to interrogate Donu, but the boss is killed by Soong, another Ashura's killer who infiltrated Thai police. Dorai and the Thai police follow Soong to the forest hideout, where Ken and Ryu managed to fight off the criminals. With all of Ashura's men arrested, Sagat is freed from prison, after his innocence is proven. He then tells Ryu that if he wishes to learn about Hadou, he should travel to India, where a monk named Dhalsim lives.

Ryu and Ken reach Kolkata, where they first help a local doctor to fight off some local thugs. Then, they reach Dhalsim's village in the hopes of learning more about Hadou. The monk, though, refuses to teach them anything, because he considers the two boys "beasts with an aggressive spirit", unworthy to be taught the technique. Meanwhile, a group of criminals enters the village's Cave of Ancients, where the village's treasure is stored, but some of them die in the attempt.

The surviving criminals threaten the villagers in order to be handed over the treasure. Ryu and Ken accept to enter the cave to save the villagers' lives. Once inside, the two boys hallucinate over the cave's mist and start to fight each other, thinking they're both fighting the "cave's monster". After almost killing themselves in the fight, they realize the hallucination and get the treasure to the criminals, only to be threatened to be killed together with the villagers. Dhalsim paralyzes the two criminals and then heals Ryu and Ken's injuries, accepting to teach the boys the ways of Hadou.

Dhalsim teaches Ryu how to use Hadou. Ryu tries to master the Hadouken technique but fails to master it. He then decides to face his inner self again in the Cave of Ancients. Here he first fights an imaginary Guile and then shoots his Hadouken at an imaginary Dhalsim. After being told he must become his own master in learning the Hadou technique, the two boys leave the village and receive an invitation from Chun Li to gather in Barcelona, Spain, where her father is to receive an award for shutting down the Ashura crime syndicate.

Ryu, Ken, and Chun Li go to see a corrida, where matador Vega Fabio La Cerda is scheduled to fight. Vega immediately notices Chun Li's beauty and falls in love with her. The four meet up a couple more times after the bullfighting arena, and each time Vega shows more affection towards Chun Li. In the middle of the night, Vega casts a love potion on Chun Li with a kiss, and manages to escape the room just as Ken notices someone is there.

Vega anonymously invites Ken and Chun Li to a party. The two accept the invitation, while Ryu stays behind to keep practicing his Hadouken. When at the party, Chun Li drifts off into a daze, and Ken is forced to accept Vega's invitation to the steel deathmatch cage in the middle of the room. Defeating the toreador would be, in fact, the only way to save Chun Li from her stupor.

The battle between Ken and Vega continues. Vega easily has the advantage, as he breaks both of Ken's feet and draws a lot of blood with his claws. Despite this, Ken manages to fare pretty well against the matador, and manages to score a few hard hits in before Vega wears him down. The deathmatch is watched very closely by Shadowlaw boss, Bison, who learns who Chun Li and Ken really are and plots how to take advantage of the situation.

After a bloody battle, Ken uses the Shoryuken on Vega and manages to finish him off, impressing Bison with his skills and awakening Chun Li from her stupor. Both Ken and Chun Li are taken in a secret room where they meet Bison. Ken gets anaesthetised, while Chun Li tries to fight her way out. Ryu recovers from the fatigue and continues to practice Hadouken on the beach. Shadowlaw's infiltrator Balrog welcomes British assassin Cammy White and tasks her to kill Dorai, falsely claiming he is a drug kingpin who infiltrated Interpol.

Chun Li tries to fight Bison, but is quickly overpowered. Both her and Ken are taken prisoners by Bison, who later calls Ken's father and asks for a 1 billion dollars ransom to free the boy. Meanwhile, Cammy White prepares to carry out her mission to kill Dorai.

Cammy seems to successfully kill Dorai in his hotel room. Meanwhile Ken's father reaches out to CIA (led by an old college friend) to rescue his son from captivity. CIA dispatches two special commandos, Nash and Guile, to carry out the mission. On the beach, Ryu is attacked by Shadowlaw wrestler Zangief, who was tasked by Bison to capture the boy and take him to the organization's headquarters.

With the help of his driver, Zangief knocks out Ryu and captures him just before Guile and Nash arrive on the beach. The two commandos then search the villa where Vega and Ken fought the night before, only to find nothing. While Dorai struggles between life and death in the Intensive Care Unit, Ryu awakens in Shadowlaw's headquarters. Bison offers the boy to join Shadowlaw, which Ryu refuses. A fight erupts between the two, but Bison easily defeats Ryu, seemingly being able to interfere with the boy's Hadouken.

While Ken struggles to recover while chained to a bed, Ryu is about to be implanted a cyberchip that would put him under complete Bison's control. Guile and Nash find Zangief's jeep, which brings them to a lead to Bison's island. Fei Long arrives in Barcelona and, as soon as he hears of Dorai's supposed death, rushes to the hospital where he meets Interpol Chief Barrack. Meanwhile, during a conversation with Cammy, Balrog starts to fear that Dorai might not be dead.

Ken finally awakes from his tormented sleep, but he's too weak to break his chains. His struggles though awaken his ability to handle the Hadou technique and to break free from his prison. Ryu is implanted with the cyberchip and falls under Bison's control. Nash and Guile decide to take action and infiltrate Shadowlaw's island.

Interpol Chief Barrack brings Fei Long to Dorai's bedside, explaining to him the whole situation and asking him to help him protect Dorai. Meanwhile, Balrog summons Cammy to the hospital, insisting that she finishes her job. Cammy begins to have suspicions on Balrog, but accepts to continue follow his orders for now. While Nash and Guile observe the situation, Ken manages to re-enter the fortress and finds Chun Li, who has been implanted a cyberchip too.

Ken discovers that both Chun Li and Ryu have been somewhat subjugated and tries, slowly but surely, to summon the Hadou-Shoryuken to break the wall that separates him from them. Bison orders Ryu to focus on summoning the Hadouken. Guile and Nash infiltrate the fortress and decide to go separate ways to cover more ground. Ken's escape is discovered by Bison, who understands that also him is capable of harvesting ki. Ken finally breaks the wall and tries to escape with Ryu, only to find his friend menacingly adopting an attack stance.

Bison orders Ryu to attack Ken, who refuses to engage and tries to convince (to no avail) his friend to snap out of his control. Guile runs into Zangief and engages in a fight with him. Cammy enters Dorai's hospital room, but her attempt to finish her job is foiled by Fei Long, who confronts her.

Guile eventually manages to defeat Zangief in the Shadowlaw's fortress. Cammy and Fei Long continue their fight in the hospital room. Ryu and Ken keep fighting under Bison's watch. Nash fights his way into the fortress' control room, where he confronts Bison. Shadowlaw's boss easily overpowers the CIA commando and chokes him to death.

Guile reaches the control room, where he finds the lifeless body of his friend Nash. Realizing it was Bison, he attacks him in extreme rage, only to be easily defeated. Fei Long manages to convince Cammy that she was in fact hired by Shadowlaw to kill Dorai, and not by Interpol. Once back to the hotel, Cammy confronts Balrog, who eventually reveals at gun's point he set her up. Fei Long and Barrack bust in the hotel room just in time to save Cammy and arrest Balrog. Ryu and Ken both use their Hadou techniques against each other, eventually resulting in the cyberchip being knocked off Ryu's forehead.

Finally free from Bison's control, Ryu ends his fight with Ken and the two resolve to save Chun Li, who is still under Bison's control. Guile regains his senses and confronts again Bison, who then orders Chun Li to fight the commando and Zoltar to evacuate the base before Interpol can get on the island. Bison then teleports himself, Guile and Chun Li in the sanctuary area of the base, where they are met by Ryu and Ken. The meeting is short-lived, as Chun Li and Guile are teleported out of the base to continue their fight, while the base itself self-destructs.

Ryu, Ken and Bison are sent to a mysterious dimension, which seems to be the origin of both Bison's psychic powers and Hadou. Here Bison asks the two boys to join Shadowlaw, which of course refuse. A battle between the three ensues, where Bison seems to continue having the upper hand. Meanwhile, Guile keeps fighting against Chun Li, unable to overpower the girl until the chip falls off her forehead. Ken manages to weaken Bison with his Hadou-Shoryuken, allowing Ryu to finish him off with a combination of Hadou moves. With Bison finally defeated, Ken decides to go back home in America, while Ryu decides to sail away and keep explore his true self.