Genius ENCOM programmer Kevin Flynn begins work on several new video games that could potentially make him rich and famous. However, Flynn's boasting about the project causes Corrupt Corporate Executive Edward Dillinger to steal the games and claim them as his own work. This causes Dillinger to be promoted to CEO of ENCOM. When Flynn tries to explain what happened, he is fired.
Later, Dillinger improves an old chess program, bringing it to life and causing it to gradually takes over ENCOM. Calling itself the Master Control Program, it has become (like its creator) a greedy, self-absorbed megalomaniac. It plans to hack the Pentagon and take control of the US missile supply, and then Take Over the World.
Flynn, now making a living owning gaming arcades, attempts to hack into the mainframe and find evidence of Dillinger's theft. After his hacking program CLU is deleted and his Group 7 access is suspended, he convinces two friends who are still employed at ENCOM, Alan Bradley and Lora Baines, to help him get into the office and hack it from there.
His plan goes well at first. With help from Alan and Lora, he gets into the ENCOM building and begins searching for the evidence he needs. While doing so, Flynn meets face-first with the Master Control Program. Flynn almost traps the MCP in a logic loop that would crash it, but out of desperation, the MCP shoots Flynn with an experimental digitizing laser. Flynn is transformed into a computer program and sent into the ENCOM mainframe.
Inside the system, all Programs take the form of humans, having the facial features of their creators and glowing lines all over their bodies. Those allied with the Users have blue lines, while the MCP's forces have red ones. SARK, a security program with Dillinger's face, is tasked by the MCP with derezzing (killing) Flynn. Flynn is put into the Game Grid, where he is forced to play video games. While he originally shrugs off the challenge, Flynn quickly realizes that inside the system, video games are an extremely dangerous game of life and death. He must then fight against another program in an Identity Disc battle.
After winning his first challenge, Flynn is imprisoned with TRON, an independent security program written by Alan, and RAM, an actuarial program written by a coworker of Alan's. Their next challenge is a light cycle battle with TRON, RAM, and Flynn against three of SARK's forces. Flynn, having programmed the game in question, exploits a glitch so that he and his team can escape the Game Grid and enter the rest of the digital world. The trio set off to find an Input/Output tower, where TRON will be able to get Alan's help in destroying the MCP.
While on the way, a sentry spots the three escapees and chases them down. While crossing over a narrow bridge, a cannon shot destroys it and separates RAM and Flynn from TRON. Flynn takes shelter in a collapsed Recognizer, a flying vehicle used by sentrie, where he and RAM rest for the night.
In his sleep, Flynn accidentally restores the broken Recognizer, realizing that his status as a User gives him incredible powers in the virtual world. RAM reveals that he was mortally wounded in the cannon fire, and dies on the Recognizer's floor, filled with hope that Flynn can stop the MCP.
Meanwhile, TRON finds a friend of his, a program called YORI (who was written by Lora). She is a part of the control system, and carries information between different sectors of the computer. YORI and TRON make it to the I/O tower, and speak with the tower guardian DuMONT. After some pleading, they convince DuMONT to let TRON speak with Alan. Alan puts a piece of code in TRON's disc, which will destroy the MCP if put directly into the program. SARK breaks in soon after, capturing DuMONT. TRON and YORI escape in a Solar Sailer, heading towards the MCP for the final battle. Along the way, Flynn is reunited with TRON and YORI.
Their victory is short lived, however, as SARK catches up to them. He destroys the Sailer, capturing YORI and Flynn but letting TRON escape. TRON hurries to the MCP's home base (a giant metal building in the center of the system), while Flynn and YORI confront SARK. SARK tries to kill them by destroying his ship with them on it, but Flynn uses his User powers to keep it together as a wireframe model.
The final battle begins, with TRON fighting against SARK with their Identity Discs. At first, it seems like a stalemate, until TRON manages to smash SARK's disc in two, tearing the evil program's head in half as well. Out of desperation, the MCP transfers all of his power into SARK, bringing him back as a giant, lumbering program with incredible power. TRON avoids the massive program while trying (and failing) to get his disc into the MCP.
From above the mesa, Flynn leaps directly into the MCP, distracting it long enough for TRON to destroy it. The MCP slowly collapses, and the original chess program is briefly seen before it too is deleted. The entire system lights up as the power the MCP hoarded for itself is released.
Back in the real world, Flynn is rematerialized, and TRON sends the information he needed to prove Dillinger's theft to the outside world, exposing Dillinger as a fraud. Dillinger is quickly removed from CEO position, and Flynn takes his place as the new leader of ENCOM.