Ryu receives an unexpected letter from his best friend Ken Masters, inviting him to America. Ryu decides to accept and meets in San Francisco with his old friend. After catching up, they go to a pub, where they find and easily beat up some military thugs. Afterward, the leader of the thugs, Sergeant Guile, enters the bar.

Guile and Ryu fight each other, though it is obvious Guile has the upper hand. The sergeant easily overpowers Ryu, and then leaves the bar with his men, telling Ryu that he has guts. Ken takes Ryu home, then fights Guile at the Air Force Base in San Francisco, badly losing as well. This double defeat motivates the two boys to travel to Hong Kong in hopes of improving their fighting skills.

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.