August "Gus" Gorman (Richard Pryor) is an unemployed ne'er-do-well looking for a job. In the opening scene, when he is at a Metropolis bank for a loan and is told that he is no longer eligible for unemployment benefits, he decides to take a job as a computer programer at Webster Industries. During his first week, Gorman discovers that he has a talent and a natural-born knack for computer programming. Dissatisfied with the low amount of money he receives for his week's pay, he embezzles $85,000 from his new employer's payroll (through an early computer hacking technique known as salami slicing). Gorman is brought to the attention of the CEO, Ross Webster. Webster (Robert Vaughn) is a megalomaniac billionaire obsessed with the computer's potential to aid him in his schemes to rule the world financially. Joined by his stuffy sister and right-hand woman Vera (Annie Ross) and his "psychic nutritionist" and mistress Lorelei Ambrosia (Pamela Stephenson), Webster blackmails Gorman into helping him.
Meanwhile, Clark Kent has convinced his newspaper editor Perry White (Jackie Cooper) to allow him a week vacation to return to Smallville for his high school reunion. Lois Lane (Margot Kidder) however plans to leave on her own vacation to Bermuda. En route with Jimmy Olsen to Smallville, Clark (as Superman), extinguishes a fire in a chemical plant containing vials of acid that can produce clouds of corrosive vapor when superheated. However, Jimmy is injured with a broken leg while foolishly attempting to get photos of the disaster.
In Smallville, Clark is reunited with childhood friend Lana Lang (Annette O'Toole). Lana is a divorcee with a young son named Ricky (Paul Kaethler). Over the next few days, Clark and Lana begin to share affection for each other, though Lana's former boyfriend Brad (Gavan O'Herlihy), Clark's childhood bully and now an alcoholic security guard, is still vying for her attention.
Meanwhile, Webster schemes to monopolize the world's coffee crop. Infuriated by Colombia's refusal to do business with him, he orders Gorman to command an American weather satellite named Vulcan to create a hurricane to decimate the nation's coffee crop. Gorman travels to Smallville and sneaks into a local business office after hours, (bribing Brad with liquor and waits until he passes out). Gorman then carries out his boss's plan.
Webster's scheme is thwarted when Superman neutralizes the tornado and saves the harvest. Webster then orders Gorman to use his computer knowledge to create kryptonite, remembering Lois Lane's Daily Planet interview from Superman years ago, during which Superman identified it as his only weakness. Gorman uses a computer to order the Vulcan to locate Krypton's debris in outer space, but after the computer fails to analyze an "unknown" element in kryptonite (making up only 1% of the meteor rock), he improvises by replacing the unidentified element with tar, garnered from a pack of Camel cigarettes that he smokes on a daily basis.
Lana convinces Superman to appear at Ricky's birthday party, but Smallville turns it into a celebration where the local mayor gives Superman the honorable key to the city. Gus and Vera, disguised as United States Army officers, show up during the ceremony and give Superman the man-made kryptonite as a gift, and are dismayed to see that it appears to have no effect on him. However, the compound begins to produce symptoms after the celebration. Superman goes through a descent into darkness as he becomes selfish, focusing on his lust for Lana, which causes him to delay rescuing a truck driver from his jackknifed rig.
Superman begins to question his own self-worth, and, as the tar-laced Kryptonite takes effect, he becomes depressed, angry, and casually destructive, committing petty acts of vandalism such as blowing out the Olympic Flame, straightening the Leaning Tower of Pisa and ripping open the hull of an oil tanker, causing the contents to spill into the sea. 'Bad Superman' also becomes scruffy looking as his bright blue and red suit becomes transformed into more of a maroon, dark blue color.
With Superman distracted, Webster furthers his plans by controlling the world's oil supply, ordering Gorman to direct all of the oil tankers to the middle of the Atlantic Ocean and having them sit there until further notice. Gorman moans that Ross gets his own way all of the time and that he feels unappreciated. He then gives Webster a series of crudely drawn blueprints for a supercomputer. Ross makes a deal with Gorman, agreeing to build his supercomputer in return for sorting out the oil tankers.
Meanwhile, Superman assuages his depression with a drinking binge, but is eventually overcome by guilt and undergoes a nervous breakdown after Ricky calls out to him, urging him to fight against his descent into evil. After nearly crash-landing in a junkyard, Superman splits into two personas: the evil, selfish, corrupted Superman and the moral, righteous Clark Kent. They engage in an epic battle across the junkyard, with the evil Superman repeatedly trying and failing to kill Clark by crushing him in industrial equipment. (They are both seemingly matched as Bad Superman, despite his powers, becomes more physically weakened after using them, while Clark still has his superhuman strength, but none of Superman's powers of flight or heat vision).
The battle ends when Clark bursts through the walls of a machine crusher and strangles his evil identity, vanquishing him for good. As a battered but unbowed Clark gazes up at the heavens, he pulls his shirt open to reveal his crest. Restored to his normal heroic self, Superman sets off to repair the damage his evil counterpart had caused.
Superman then goes to the apartment penthouse of Webster to confront him only to find a video message that they are hiding out in the Grand Canyon... the location where Gus Gorman's supercomputer has been built.
After riding on mules to a crest ridge, Webster, Vera, and Lorelei take "air bikes" down to the canyon floor, sans Gorman who decides to ride down by his own mule. Webster, Vera, and Lorelei arrive at a large cave where the supercomputer is and set out to await Superman's arrival.
After defending himself from numerous ground-to-air rockets and an MX guided missile, Superman confronts Webster, Vera and Lorelei, and is forced into a battle with Gorman's supercomputer, which severely weakens him with a kryptonite ray. Gorman, guilt-ridden and horrified by the prospect of "going down in history as the man who killed Superman", destroys the ray with a firefighter's ax, whereupon Superman flees. The living computer becomes self-aware and begins to defend itself against Gorman's attempts to disable it, draining power from electrical towers, causing massive blackouts across the North American continent.
Ross and Lorelei escape from the control room, but Vera is pulled into the computer and forcibly transformed into a cyborg. Empowered by the supercomputer, Vera attacks her brother and Lorelei with beams of energy that immobilize them.
Superman returns to the battle with a canister of the Beltric acid from the chemical plant he saved earlier. After battling the living computer which attacks him with bolts of electricity and energy rays, the intense heat emitted by the machine causes the small canister acid to turn volatile, eventually destroying the supercomputer and saving everyone.
Superman flies away with Gus Gorman, leaving Webster and his cronies behind to deal with the authorities. After dropping Gus off at a West Virginia coal mine, where he gives him a job reference (which Gus declines and decides to slip away to re-start his life elsewhere), Superman returns to Metropolis and reunites with Lana Lang, who has relocated to the big city with her son Ricky and found employment as Perry White's new secretary. Lois Lane also returns from her vacation (which she has been away throughout the entire movie) and immediately shows signs of jealousy when she meets Lana for the first time.
In the final scene, during a lunch break, Clark (as Superman) flies to Italy to correct one final problem he made as Bad Superman. He pushes the Pisa tower back into its original place... much to the dismay of a local vendor who is now selling straightened Pisa towers.