Having been recruited into the criminal organization, Shadaloo, the former Street Fighter world champion Sagat is tormented and humiliated by being made to watch footage of his defeat at the hands of Ryu. This is done at the behest of Bison, who encourages Sagat's hatred of the new champion and suggests that he strike at Ryu's friends to get at him.
Meanwhile, Ryu finds himself growing distant from his girlfriend, Chun-Li and his best friend, Ken. While Chun-Li's joining Interpol and pursuing revenge against Bison are the source of the rift between her and Ryu, it is Ken's decision to prioritize fame and fortune over fighting and training that has alienated him from his old sparring partner.
After a movie shoot and night on the town, Ken is attacked by another Shadaloo soldier, Balrog. Out of practice, Ken only narrowly defeats Balrog, and finds himself in dire straits as Sagat appears and challenges him.