The movie begins with the main protagonist Ryu facing off against Muay thai champion Sagat. With the thunder roaring in the background, the two fight an awe-inspiring duel. However, despite his renowned strength and abilities, World Warrior Champion Sagat finds himself losing the battle. Channelling his chi, he unleashes his built-up internal energy at his challenger. Ryu evades the blow, and counter-attacks by unleashing his chi in the form of a Dragon Punch, inflicting a severe wound on Sagat's chest, a wound that later becomes Sagat's trademark scar. Enraged, Sagat charges towards Ryu, determined not to lose. Ryu, seeking his inner calm, gathers his internal energy and unleashes it in the form of an Hadoken or energy wave. The battle is over. However, unbeknownst to the combatants, the fight was being recorded and analysed by a droid.
Several years later, and Ryu, the legendary "Wandering Warrior", now travels the Asian continent in search of battle. On the other side of the world, Ken, Ryu's childhood friend and rival, finds himself dissatisfied with the lack of challenge. Eagerly desiring a rematch with his training partner Ryu, he reminisces over his childhood experiences. However, he finds himself defeated and abducted by a mysterious person going by the name of M.Bison after Bison finds similarities in the fighting abilities of Ken and Ryu.
Rumours of an underground terrorist organization named Shadowloo that has unleashed several attacks on worldwide governments attracts the interest of Interpol. Chun-Li, an Interpol agent who possesses a personal link to Shadowloo leader M. Bison, finds that Shadowloo has been abducting Streetfighters around the world to use as assassins. Seeking the help of Guile, she enlists his help in locating Ryu.
Guile finds Ryu and warns him of the plot and the possibility that Ken Masters may have been brain-washed. At that point, Ken steps out. Controlled by the psychic powers of Bison, Ken fights with an inhuman rage. Ryu, unwilling to hurt his friend, slowly loses the battle. Memories of the past wreak havoc on Ken's mind, and finally, through flashbacks of his childhood past with Ryu, Ken succeeds in breaking the psychic control. Aiding Ryu, the pair succeed in defeating M. Bison.... for now.