Thousands of years ago in ancient China, an evil army of shadow warriors… terrorized the great city of Shang-sa. To save his people the good king sacrificed himself to create a mystical medallion. Realizing the ultimate powers of the medallion, the king split it in half. To one son he gave the power over body, to the other, power over the soul. This is the legend of the Double Dragon. — Koga Shuko narrating at the beginning of the movie.
Koga Shuko, a crime lord and businessman, explains to his underlings about a powerful, magic medallion called the Double Dragon, which has been split into two pieces. He obtains one half and orders his henchmen to find the other for him.
Teenage brothers Billy and Jimmy Lee, and their guardian/adoptive mother Satori head home after citywide curfew from a martial arts tournament. On their way, they are accosted by gang members, who rule the streets after dark due to an uneasy pact made with the police department to keep them from running amok during the day. They escape with help from the Power Corps, a group of vigilantes headed by their friend Marian, daughter of the police chief. Unfortunately, Abobo, a gang leader, discovers Satori holds the second medallion half and reports this to Shuko. For his failure in securing it, he is mutated into a hulking giant.
At their abandoned theater home, Satori explains to a skeptical Billy and Jimmy about the Double Dragon and how their piece must be protected, and she places it in the care of Billy. Shuko, with his henchmen in tow, pays the Lees a visit, intent on taking the other half. He reveals the ability of his medallion, the power of the soul, which gives the user the power of possession and a shadow form, by temporarily possessing Satori. Billy and Jimmy successfully incapacitate Abobo, but Shuko has the place doused in gasoline and lit on fire. Satori sacrifices herself so the brothers can escape with the Dragon.
Unable to find the brothers on his own, Shuko unites and takes over the gangs by displaying his power and sends them after the Lees. Billy and Jimmy narrowly get away, and seek refuge in the Power Corps hideout. Marian agrees to help them, using this as an opportunity to get rid of the gangs once and for all, and the three of them decide to go to Shuko’s office building to steal his medallion. They ultimately fail and are forced to flee, but Jimmy is captured in the process.
Billy and Marian return to the Power Corps base, and lament about how none of them have been able to figure out how to use their Dragon piece. Marian points out a discovery they made that the wearer of the medallion is immune to the powers of its counterpart, meaning Shuko is not able to possess him as long as he has it. Suddenly, the gangs attack the hideout. In the mélêe, Jimmy reappears. Billy is elated; however, Jimmy is merely being controlled by Shuko as he tries to pummel his brother into submission. Billy then accidentally activates his medallion’s ability, which is the power of the body and effectively makes him invulnerable to harm. Knowing this, Shuko threatens to kill Jimmy instead. This doesn’t succeed either, so he releases Jimmy to distract Billy long enough to get the medallion.
Shuko unites the halves and turns into a pair of shadow warriors with katanas that disintegrate anything they slice through. The Lee brothers fight, but cannot beat him. Abobo, who had previously been taken prisoner and since reformed, reveals to Marian that Shuko’s weakness is light. Marian reactivates the hideout’s generator, and the shadow warriors are rendered powerless. Billy and Jimmy attack, forcefully recombining the shadows into Shuko, and acquire the Double Dragon halves. They combine the two pieces, granting them matching uniforms and the medallion powers, and they briefly see a vision of Satori’s spirit as she gives them encouraging words. The brothers pummel Shuko, and Jimmy possesses him to make him do embarrassing things. During this time, Marian’s father arrives to bring Shuko to justice and to take care of the gangs once and for all. Jimmy has Shuko write a check to the police department for $129 million before encouraging the police chief to arrest him.
Shuko is sent to jail, the police department has renewed strength to fight the gangs instead of compromising with them, and Billy and Jimmy can now keep both halves of the Double Dragon safe.