Davey Osborne (Henry Thomas) is an 11-year-old who lives in San Antonio with his father, Hal Osborne (Dabney Coleman). His mother has recently died, leaving just him and his father, a military air traffic controller who has problems relating to his child. Davey is a lonely child and is still grieving over his mother, so he immerses himself in the fantasy world of Cloak & Dagger, an espionage game which exists in both role playing and video forms. Davey has one friend, Kim, (Christina Nigra) a girl who lives nearby with her single mother. Davey is interested in the world of espionage and his hero is the character Jack Flack from the game. He wants to live an action-packed life like Jack Flack and he carries around a water pistol as his 'gun' and a softball as his 'grenade'. Davey spends much of his free time playing Cloak & Dagger and spinning elaborate fantasies involving Jack Flack, an imaginary friend who takes the form of a more dashing version of his father (the role of Flack is also played by Coleman).
One day Davey's friend Morris (William Forsythe), who owns a video game shop in the local mall, sends Davey and Kim on an errand, where Davey witnesses a murder. Right before the victim dies, he gives Davey a Cloak & Dagger video-game cartridge and says that the cartridge contains important military secrets, that he must get it to the FBI. Davey seeks help from the authorities but they simply believe him to be engaging in fantasy play.
Murderous spies, led by the malevolent Dr. Rice (Michael Murphy), chase Davey relentlessly as he flees across the city. The action moves from Davey's house, to a series of tour boats, to the Alamo. Along the way Davey manages to continually evade his pursuers with the aid and advice of the imaginary Jack Flack. However, along the way Davey's relationship with Flack becomes more strained as his own sense of morality and concern for his friend Kim collide with Flack's harsh methods and cavalier attitude. This comes to a head when Davey is cornered by Rice along the River Walk.
