Renowned hero Sonic the Hedgehog has been framed for stealing a Chaos Emerald from a bank in Central City and has been taken into custody by the Guardian Unit of Nations (G.U.N.), the national military. While the helicopter containing Sonic flies over the city, Sonic breaks free and using a piece of metal from the chopper as a snowboard, Sonic makes his escape. Sonic outruns the police and military and does battle with one of G.U.N's giant walkers: Big Foot. Sonic defeats the robot and encounters a black hedgehog, who goes by the name of Shadow. Shadow is the one who stole the Chaos Emerald and uses it to escape with the power of Chaos Control. Sonic is re-captured by G.U.N and taken to Prison Island.

Meanwhile, Knuckles the Echidna is having trouble guarding the Master Emerald when the mysterious thief Rouge the Bat attempts to steal it. In the middle of their argument, Dr. Eggman snatches the emerald while they're fighting, but Knuckles, in order to prevent Eggman from stealing the gem, shatters it. Knuckles then sets off to find the pieces and restore the Master Emerald.

On Prison Island, Tails goes to break Sonic free as he knows that his friend is not guilty. Upon arrival, Tails, piloting his Cyclone walker, saves Amy Rose from Dr. Eggman. Amy finds Sonic and releases him from his cell, Sonic racing off to find Shadow. Sonic goes into the forest and finds Shadow. The two battle and then have to flee when Eggman announces that the island will blow up from bombs Shadow has set.

Later on, Sonic, Tails, and Amy witness Eggman destroying half the moon with a powerful weapon, the Eclipse Cannon on board the Space Colony ARK. The three realise that Eggman could destroy Earth with that kind of firepower; all he needs is the seventh Chaos Emerald. Later joined by Knuckles, Sonic and the others must race to the ARK and destroy the cannon before Earth is blown into extinction. Tails succeeds in destroying the colony's power supply but is captured by Dr. Eggman, along with Amy. Meanwhile, Knuckles finds the last pieces of the Master Emerald and encounters Rouge. After a confrontation Knuckles saves Rouge's life as she very nearly falls to her death. In return, Rouge grudgingly gives Knuckles her share of the Master Emerald and Knuckles restores the Master Emerald. Sonic rushes to meet Eggman, who is holding Amy and Tails hostage in return for the last Chaos Emerald. Sonic attempts to trick Eggman with a fake emerald created by Tails, but Eggman is aware of the plot and sends Sonic off into space. Sonic uses the fake emerald as a base for Chaos Control, and barely escapes his near death in the capsule. Sonic still has some time to get to the Eclipse Cannon, and after fighting off Shadow is seen to be alive by his friends while holdining on to the outside of the Eclipse Cannon as it starts to screw up. However, while Tails and Amy aren't watching, Eggman snatches the Emerald and escapes.