Three misfit parapsychology research professors that specialize in ghosts, Proffesor Elvin Gadd (Kazumi Totaka), Boonie the Boo (Keith ), and Luigi Mario (Charles Marnet), are kicked out of Kooplumbia University after their research grants are terminated.
Their first investigation is a haunting at the Mushroom City Public Library and after seeing some symmetrical book stacking they encounter a ghost (The Blue Lady) that runs them out of the Library.
They decided they would take matters into they own hands and they start an business named "Boobusters", a "professional paranormal investigation and elimination service", out of an old firehouse, using a B-Dasher dubbed "Spectro-1" to get about the city and hiring Joline Mush (Annie Potts) to handle the phones. Daisy Sarasa (Deanna Mustard) of 55 Koopa Park West, comes to the Boobusters and asks for their help. The Boobusters do a few tests to determine that she isn't crazy as she recounts a paranormal experience in her kitchen centering around the name "Bedlam". Luigi seizes the opportunity to get romantically closer to Daisy, and goes with her to the apartment. Using the Boo Radar he checks out the place, finds nothing in the main room, and bedroom. Daisy then directs him toward the kitchen where he finds eggs that cooked themselves on the counter, but gets no readings on the Boo Radar despite using it correctly.
Meanwhile, their funds are nearly dried up eating a Chinese food dinner, which they ate slowly. Joline gets a call with a serious client, and she rings the alarm bell. The Boobusters run and get dressed, then leave in the Spectro-1. They show up at Shroomgewick Hotel and the Hotel manager tells them that they are having problems with a resident ghost. Following a successful test of their new Poltergusts, they split up to search the hotel for the ghost. Luigi finds the ghost which then slimes him. E. Gadd calls Boonie to tell him that the ghost is now in a ballroom. They enter the ballroom and as they attempt to capture it, they destroy the room and make a lot of noise. The first capture is a success, and they find themselves an overnight success across both Mushroom City and the Kingdom. As the amount of calls grows, the team is required to hire a fourth member, Toad Toadson(John Stocker). An unwanted side effect of their new found popularity produces Lawyer Shroob (William Atherton), now woking for the Environmental Protection Agency. He comes to the firehouse trying to inspect the Storage facility which Luigi refuses to let him do.
One night Daisy enters her apartment and is talking on the phone to her mother; after the call she gets grabbed by arms that come out of her chair. She is taken in to the kitchen where she becomes possessed by Bedlam. Meanwhile, Russ T. (Rick Moranis), another resident of the apartments, is hosting a party for the fourth anniversary of him becoming and accountant, when a dog (also described as a bear and a cougar - but really a Shayde) attacks, and chases him out of the building and to a restaurant where the it possesses him.
Luigi makes a visit to Daisy's apartment. He quickly realizes that she has been possessed by Bedlam, The Gatekeeper of The Shadow Queen. She comes on to him but ends up growling fiercely and levitating above her bed in frustration as he repeatedly rejects her advances.
Russ T., similarly possessed by Maylin, The Keymaster of The Shadow Queen, stumbles around Koopa Park. He harasses locals until finding a carriage Yoshi and confusing it with The Gatekeeper. When the coachgoomba questions him, Russ T. responds by angrily flaring his eyes red and growling at the man. Later the cops bring Russ T. to the Firehouse and ask E. Gadd if he'd take him, as he is exhibiting strange behavior. E. Gadd recognizes that Louis is possessed by Maylin, aka the "Keymaster". Luigi later calls E. Gadd to tell him about Daisy being possessed by Bedlam, aka the "Gatekeeper".
Lawyer Shroob obtains an court order to shut the containment grid down, and unable to stop him, the team flees the firehouse as the grid collapses and hundreds of freed Boos flood the city. In the chaos, Bedlam awakes and Maylin escapes and makes his way back to 55 Koop Park West where they unite with a passionate kiss. Lawyer Shroob orders the Boobusters arrested while the Boos create panic across the city. While waiting in jail, the team recognizes that Daisy's apartment building was a huge super-conductive antenna, designed and built expressly for the purpose of pulling in and concentrating spiritual turbulence. Princess Peach (Jeannie Elias) orders the release of the Boobusters from jail, allowing them to get to work to prevent the potential catastrophe overriding Lawyer Shroob's demands.
Assisted by the police and Army, the Boobusters make their way to the top of 55 Koopa Park West. They are too late to prevent the possessed Daisy and Russ T. from completing the ritual for the coming of Gozer. As they open a dimensional gate on the top of the building, they are transformed into the Shayde forms of their possessors. When The Shadow Queen (Slavitza Jovan) emerges in a female humanoid form, the team tries to shoot her with their Poltergusts, but fail to harm her. The Shadow Queen disappears and tells them to select the next form it will take, and though the team tries to empty their minds, Boonie is unable to. He thinks about the most innocent thing he could imagine: the Stay Puft Marshmallow Goomba. The team finds that a giant version of the marshmallow mascot has begun to lay waste to the city as it makes its way to the apartments and starts climbing the building. E. Gadd realizes that the only way to end the destruction is to reverse the particle flow through the gate by crossing the streams, resulting in "total protonic reversal" which would destroy The Shadow Queen and the interdimensional gate. The plan is risky at best, but there is definitely a very slim chance of their survival. As the giant creature reaches the top of the building, the team executes E. Gadd's plan, causing the gate to seal itself, creating an explosion and burning the Stay Puft Marshmallow Goomba away into large amounts of liquid marshmallow fluff (Some of which hits Lawyer Shroob). The Boobusters find that they have all survived, and that Daisy and Russ T. have returned to their normal, unpossessed, human forms. The team is cheered on as they leave the building and drive away.