Ryu is still contemplating the death of his master, Gouken, while at the same time experiencing trouble with the "Dark Hadou" (殺意の波動, Satsui no Hadō, lit. "Surge of Murderous Intent"), an evil energy which Gouken's brother, Akuma, succumbed to a long time ago. While in the city, Ryu fights off a few agents working for Shadaloo, gaining the attention of Interpol agent Chun-Li, who does some background research and realizes Ryu is the man who beat Sagat, the Muay Thai Champion, many years ago. Also catching sight of Ryu is aspiring martial artist Sakura, who becomes fascinated with Ryu and vows to track him down and become his student.
In the prologue, a fight between Japanese martial artist Ryu and Muay Thai champion Sagat rages until Ryu severely scars Sagat across the chest with a Shoryuken. As Sagat charges towards Ryu in a rage, Ryu fires a Hadouken at the screen, leaving the battle unattended.
Although the film's story is rooted in the familiar fairy tale of the same name, this version does add a few new characters and plot twists. The tale starts out in the manner that most of us are accustomed to—Jack resides with his mother in a small house out in the country. Being very poor, they eventually find themselves forced to sell their cow, which has stopped giving milk. Jack runs into a mysterious man on the way into town and trades the cow for a handful of "magic" beans. Jack's mother is not very thrilled with him and ends up throwing the beans out the window.