As part of the first Starfleet Battle Simulation program, Picard and Riker are tapped to compete against each other in a mock battle. Picard is given command of the U.S.S. Enterprise, while Riker is assigned the Hathaway, a hopelessly unequipped, 80-year-old vessel which he's given 48 hours to outfit for battle. Acting as an observer of the exercise is Kolrami, a master strategist from the Zakdorn race, which is reputed to have the greatest strategic minds in the galaxy.
When Riker and his team beam aboard the Hathaway, they are shocked by its dilapidated condition. It quickly becomes obvious that the outclassed ship's only hope for victory lies in outwitting the U.S.S. Enterprise crew.
Meanwhile, Dr. Pulaski challenges the arrogant Kolrami to play Data in the highly complex game of Strategema. Although Pulaski is certain that the android's skills will prove superior to the Zakdorn's, Kolrami wins. When the war games begin, the Hathaway deftly wins round one by distracting the U.S.S. Enterprise with a holographic image of a Romulan warship, thus giving Riker's crew the chance to record several electronic "hits." Moments later, when Picard mistakes a real Ferengi warship for another holograph, he's stunned when the Ferengi launch a ferocious assault. The now-crippled Enterprise is ordered to surrender the Hathaway, which the Ferengi mistakenly believe is armed with a secret weapons system. Unwilling to sacrifice the lives of his friends, Picard masterminds a plan by which the Ferengi think that the U.S.S. Enterprise has blown up the Hathaway, thus allowing the smaller ship to warp speed away to safety.
With the war games completed, Data engages Kolrami in a rematch of Strategema. When Data changes his strategy and forces the game to end in a stalemate, Kolrami storms out, humiliated by the android, as the crew cheers Data's victory.