Set in the summer of 1958 Sandy Olsson (Olivia Newton John) and Danny Zuko (John Travolta) meet on a beach while on vacation. They fall in love but Sandy has to go back to Australia with her parents. Danny doesn’t want to let her go and tells her that it’s not the end, just the beginning.
It turns out, however, that Sandy’s parents have changed their minds and will be staying in America so she enrols at Rydell High School unaware that Danny also goes there.
Danny is also unaware that Sandy has enrolled and embroiders his account of his holiday romance so as to make him look like Jack the Lad to his friends. Meanwhile Sandy is giving an entirely different account of her time with Danny; a more honest one, in fact. When Rizzo (Stockard Channing), one of the members of The Pink Ladies, hears that it’s Danny she engineers a meeting between them but Danny being Danny has to maintain his street cred in front of his friends, the T-Birds, and Sandy storms off angry and hurt.
Frenchy (Didi Conn), another Pink Lady member, who befriends Sandy, feels sorry for her and invites her to a pyjama party where Sandy tries a cigarette, alcohol and ear piercing by Frenchy. It does not end well as it makes Sandy ill. Meanwhile, the girls are making fun of her singing Look at me, I’m Sandra Dee.
Rizzo has had enough of the sleepover and decides to leave with Kenickie (Jeff Conoway) when turns up with the T-Birds, leaving the rest of his group to walk. Risso and Kenickie are next seen in the back of the car making out when Leo (Dennis Cleveland Stewart), the leader of The Scorpions, a rival gang, turns up and damages Kenickie’s car.
While working on the repairs the T-Birds daydream about how good the car will look when painted and Danny convinces the rest of the gang that their old banger could be turned into a really hot car.
Danny later goes to the Frosty Palace to meet Sandy to try and make amends but sees her talking to jock Tom Chisum (Lorenzo Lamas) and realises what he has to do to impress Sandy. He tries basketball, wrestling and baseball but his temper gets the better of him. He eventually decides that running might be his thing until he sees Sandy talking to Tom and falls over. Sandy runs over to see if he’s ok and all seems to be on again. He takes Sandy to the Frosty Palace hoping that they can be alone so he doesn’t have to protect his image in front of his friends but it was not to be.
After they all leave Frenchy, who earlier revealed that she was going to drop out of school to go to beauty school, removes her scarf to reveal pink hair and conjures up her guardian angel (Frankie Avalon) who tells her what to do to the tune of Beauty School Dropout.
The TV show National Bandstand is being broadcast live during the dance held at Rydell High and Danny takes Sandy. Out of pique against Kenickie, Rizzo turns up with Leo from the rival gang. Kenickie retaliates by arriving with Cha Cha DiGregorio (Annette Charles) and ex of Danny’s.
Vince Fontaine (Ed Byrnes) is the disc jockey and gets busy chatting up Marty, the flirty one of Pink Ladies. The dance off doesn’t go as planned and Danny ends up dancing with Cha Cha and winning the contest and Sandy leaves once again hurt and upset.
Later Danny tries to make amends at a drive-in movie by giving Sandy his ring. She thinks that means Danny respects her but he tries to make a move on her. She screams, gets out of the car and throws the ring back at him.
Meanwhile in the drive-in restroom, Rizzo is confiding in Marty that she might be pregnant by Kenickie. But Marty can’t keep a secret and neither can Sonny (Michael Tucci), one of the T Birds when he overhears Marty say make way for the lady with the baby.
Later, Kenickie and Leo prepare for their race. Unfortunately Kenickie gets knocked out so Danny has to take his place. Sandy watches Danny win from a distance and wonders about her own image. As she walks away Frenchie sees her and goes over to her. Sandy asks her for help in changing her look.
The last day of school and Danny turns dressed as a jock over his usual attire, while Sandy arrives dressed in a leather jacket, tight trousers and top, high heeled shoes, new hairstyle and smoking a cigarette. They sing You’re The One That I Want and ‘fly’ off in Danny’s car.