The story revolves around the Central Intelligence Agency contracting Pacific Tech Prof. Jerry Hathaway (William Atherton), to construct a chemical laser weapon capable of eliminating individual human targets from space. Hathaway creates a research team at the university that are, unknown to them, working on this device. Under pressure from the agency to increase the power of the laser, Hathaway searches outside of the university for a fresh perspective and sets his sights on an emerging prodigy, Mitch Taylor. The professor informs Mitch and his parents that he has been accepted for the mid-winter term at Pacific Tech. He becomes the second youngest student ever accepted into the university. The youngest, according to Hathaway, "cracked under pressure within 6 months."

Upon arriving on campus, Mitch is assigned a dorm room with Chris Knight. Chris is in his senior year at Pacific Tech and works on Prof. Hathaway's laser project. He also meets the rest of the laser team, including Kent (Robert Prescott), who sees Mitch as a threat (particularly because the professor tells Kent that he will now be reporting directly to Mitch). Back at the dorm, Mitch meets another student, Jordan (Michelle Meyrink), with whom he falls in love. He also encounters the mysterious Lazlo Hollyfeld (Jon Gries) who appears and disappears via Chris' closet. After a stressful day of working, Mitch tells Chris that he is having trouble with the laser and thinks that they're going in the wrong direction. He comments on how Chris is the only one who knows how to use the thing, which is frustrating because he's never around. Chris decides to make it up to Mitch and throws a party on campus. Kent discovers the party and informs Hathaway that his prize student is goofing off instead of working on the project. Mitch gets in trouble with Hathaway, who questions if it was the right decision to have accepted someone so young into the school. Mitch, upset, returns to the dorm and calls his parents in tears. He tells them that he dislikes the school and wants to come home. They tell him to stay strong and that his room has already been rented out.

Meanwhile Kent, eavesdropping on the conversation, records it and plays it back later during lunch in the cafeteria. Angry and humiliated, Mitch returns to his room and begins to pack up his things. Chris tells Mitch not to run and that he has to get even with Kent. "It's a moral imperative!" The gang then disassemble Kent's car and reassemble it in his dorm room, hydraulically pumped to simulate it running. Furious with his shenanigans and slacking off, Hathaway sends for Chris and tells him that regardless of his marks at the end of the semester, he is expelled from Pacific Tech. In a reversal of the first act, Chris, resigned to his fate, has a discussion with Mitch, who convinces him that he can't leave and he must get even with Hathaway. Again, "It's a moral imperative!".

Much to the professor's surprise, Chris decides to regularly attend classes and continues to work on the laser project. He even takes Hathaway's final exam, before which though, Kent tampers with the laser by putting grease on the optics. Later, during a routine test by Chris, the laser malfunctions and destroys itself. Angered, Chris heads to the dorm room kitchen where, after stumbling across some dry ice, he has an epiphany and solves the power problem that has been plaguing the project. The team tests out Chris's theory and fires a beam "hotter than the sun" which burns clear across town. It gives Hathaway the five megawatts he needs and Mitch, Chris and the gang decide to go out for dinner to celebrate. However, during their celebrations, Lazlo analyzes their new creation and deduces that the laser's true purpose can only be as a weapon. Returning to the school, they find that Hathaway has already taken the device, and Chris faults himself for not realizing the professor's plan sooner. After an inventive interrogation of Kent, the group finds out that the laser is going to be tested soon at an Air Force base nearby.

Chris and Mitch manage to sneak in and successfully crack the computer controlling the laser and change its target coordinates to Hathaway's new house (in reality, the coordinates stated point to farmland in Oxnard, California). They call Dr. Meredith (Severn Darden) and Congressman Doughton (Joe Dorsey) over to the house to witness the weapon firing. Inside the home, the gang have placed a huge container of popcorn kernels, (popcorn having been established as a food that Hathaway dislikes). Upon being hit by the laser, the popcorn pops and causes serious structural damage to the house. Our heroes and neighbourhood children frolic in the popcorn over the closing credits.

To prepare for the film, Martha Coolidge spent months researching laser technology, the policies of the CIA, and interviewed dozens of students at Caltech.

While the actual campuses used in the filming were those of Pomona College and nearby Occidental College, many references suggest that "Pacific Tech" is a thinly disguised version of Caltech, mixed with some elements of similarly-technical Carnegie Mellon University.[citation needed] Dave Marvit, a former Caltech undergraduate student, was a consultant for the film, and photographs of graffiti on the walls of Dabney House at Caltech were used for interior sets.[citation needed] The initials "DEI", well known at Caltech to stand for "Dabney Eats It", occur several times in the film: "Darlington Electronic Industries" sponsors Dr. Hathaway's TV show (and Chris and Kent compete for a job there), and the students transport the popcorn to Dr. Hathaway's house in a service van ostensibly belonging to "Drain Experts, Inc." Coolidge, a stickler for authenticity, had many Caltech undergraduate students on the set as extras.[citation needed] The Tanning Invitational scene, featuring bikini-clad women (an actual Caltech annual event at the time), was filmed during finals week, and therefore all the extras in that scene are non-students.