On the Planet Eternia, at the center of the Universe, Skeletor's (Frank Langella) army has seized Castle Grayskull and captured the Sorceress of Grayskull (Christina Pickles). He plans to exploit Grayskull's hidden power when the "Great Eye of the Galaxy" (a portal in the castle's throne room) opens.
The remaining Eternian defenders are scattered and outnumbered. Among them are Eternia's greatest warrior and Skeletor's archenemy, He-Man (Dolph Lundgren), veteran soldier Man-At-Arms (Jon Cypher) and his daughter Teela (Chelsea Field). They attack a unit of Skeletor's troops, and rescue a Thenorian inventor/locksmith named Gwildor (Billy Barty), who takes them to his home and tells them Skeletor has stolen his newest invention: a "Cosmic Key" that can open a portal to any point in time and space. Skeletor used it to breach Castle Grayskull, but Gwildor still has the prototype. When Skeletor's forces arrive seeking it, Gwildor escapes with it and the Eternians through a secret passageway, directly to Grayskull.
At Grayskull, they are ambushed by Skeletor and his troops. In desperation to flee, Gwildor uses the Key to arbitrarily open a gateway, which happens to lead to just outside Whittier, California. The Key is lost upon their arrival and they split up to find it. Meanwhile, in Whittier, two teenagers, Julie Winston (Courteney Cox) and Kevin Corrigan (Robert Duncan McNeill), discover the Key and start pressing its buttons. This allows Skeletor's second-in-command, Evil-Lyn (Meg Foster), to trace the signal to Earth. She sends a crack team to recover it, consisting of Saurod, Blade, Beastman and Karg (who is appointed as leader).
Kevin, an aspiring musician, mistakes the Key for a Japanese synthesizer and takes it to a friend at a music store to get a second opinion, leaving Julie in their high school gym. Karg's team arrives and chases Julie until He-Man rescues her. Karg's team returns to Grayskull where, incensed by their failure, Skeletor kills Saurod with a blast of energy and sends the others back to Earth, with a larger force under Evil-Lyn's command.
Kevin returns to find the school on fire and Julie missing. The detective on scene, Lubic (James Tolkan), takes Kevin to Julie's house to look for her. Julie calls home, and Kevin answers. She tells him the importance of the Cosmic Key and to guard it, but Lubic confiscates it, suspecting it is stolen, and leaves. Immediately afterward, Evil-Lyn captures and interrogates Kevin about the Key with the use of a mind control collar, then leaves to get the Key from Lubic.
Julie and the Eternians reunite with Kevin, remove his collar and proceed to the music store where Lubic has taken the Key for identification. Skeletor's troops also arrive at the store and a battle ensues. Julie hides in a back room with the Key, but Evil-Lyn, holographically disguised as Julie's dead mother (Gwynne Gilford), lures her out and persuades her to hand it over, before revealing her true self.
With the Key acquired, Skeletor triumphantly arrives on Earth. He-Man retrieves the Key from Evil-Lyn, but Skeletor surrounds his friends and critically injures Julie with magic lightning, destroying Gwildor's Key in the process. He-Man surrenders to spare his friends and returns to Grayskull as Skeletor's slave. The remaining Eternians combine their technology to create a new Key, using a regular synthesizer to play the particular melody required for Grayskull, which Kevin had memorized. Lubic blunders his way into the portal and is transported to Eternia with them.
On Eternia, He-Man is brought inside the throne room of Castle Grayskull and chained to the floor by Skeletor's warriors. Skeletor informs He-Man that he will kneel before him for all of Eternia to witness, before he is killed. In a show of defiance, He-Man lunges towards Skeletor and states that he will never kneel before him. Enraged, Skeletor orders Blade to torture him with a laser-whip. Bound and virtually broken, He-Man is forced to watch the Great Eye of Grayskull open and Skeletor absorb the powers of the universe. Convinced that he is now the Master of the Universe and is finally victorious over his nemesis, Skeletor once again orders He-Man to kneel before him, to which He-Man again refuses. Skeletor demonstrates his new powers in an attempt to force He-Man to kneel.
Back on Earth, Gwildor builds a make-shift Cosmic Key via a combination of a keyboard and Eternian equipment from Man-At-Arms and Teila. Kevin remembers the tones used by the Cosmic Key and plays the keyboard to activate a dimensional doorway back to Eternia and inside Castle Grayskull. As Skeletor orders them to be destroyed, he accidentally blasts He-Man's chains in the process. This frees He-Man, which allows him to take out many of Skeletor's minions and allows him to reclaim the sword of Grayskull. Evenly matched, He-Man does battle with Skeletor. Using the sword of Grayskull, He-Man destroys Skeletor's staff, causing Skeletor to lose his newfound powers. In desperation, Skeletor draws his sword, but He-Man knocks him into a deep moat at the bottom of the castle.
The rescued Sorceress heals Julie, and a portal is opened to return the Earthlings to Earth. Lubic, treated as a hero here, decides to stay on Eternia. Awakening on the morning of her parents' death in a plane crash, Julie prevents them from taking the flight. She then finds Kevin, who confirms their shared experiences were not just a dream and holds out a souvenir from Eternia: a small blue sphere containing a hologram of He-Man in front of Castle Grayskull.
After the credits, Skeletor raises his head from red liquid at the bottom of the moat and proclaims, "I will be back!"