The story follows music composer/singer Winslow Leach, seen by satanic record producer Swan during his performance as a back-up to the 1950s-style nostalgia band The Juicy Fruits, which Swan produces. Swan believes Winslow's music perfect to open "The Paradise" – Swan's highly anticipated new concert hall – and has his right-hand man Arnold Philbin steal it. One month later Winslow goes to Swan's Death Records to inquire about his music but he is thrown out. He sneaks into Swan's private mansion, and observes several women rehearsing his music for an audition. One is Phoenix, an aspiring singer, whom Winslow deems perfect for his music and the two quickly fall for one another. Winslow realizes Swan's plan to open the Paradise with his music. Winslow sneaks in and Swan orders his minions to beat up Winslow and frame him for drug dealing.
Winslow is given a life sentence in Sing Sing Prison. Winslow's teeth are extracted and replaced with shiny metal ones as part of an experimental prisoner program funded by the Swan Foundation. Six months later, Winslow hears that The Juicy Fruits, whom he hates, have made an anticipated hit record of his music with Swan's backing. Winslow escapes prison in a delivery box and breaks into the Death Records building where he destroys a record press. A guard catches him, and the record press crushes and burns his face and destroys his vocal cords. With his face severely mutilated, a disoriented Winslow sneaks into the Paradise costume department and dons a long, black cape and a silver, owl-like mask, becoming the Phantom of the Paradise. He then terrorizes Swan and his musicians and nearly kills The Beach Bums (the former The Juicy Fruits, who have traded doo-wop for surf music). The Phantom confronts Swan who recognizes him as Winslow. Swan offers the composer a chance to have his music produced his way. In a recording studio, Swan provides the Phantom with an electronic voice-box, enabling him to speak. Swan asks the Phantom to rewrite his cantata for Phoenix, who agrees if Phoenix is the lead singer and he signs a contract in blood. But the tapes plays Swan's voice as ragged. While the Phantom remains in the recording studio rewriting his cantata, Swan breaks the deal by telling Philbin that he resents Phoenix's "perfection" for the lead role.
The Phantom completes Faust, but Swan replaces Phoenix with a pill-popping male glam rock Prima donna named "Beef" in the lead of Winslow's Faust with Phoenix as backup singer. Swan steals the completed cantata and seals the Phantom inside the recording studio. The Phantom escapes and confronts Beef (a comic allusion to the shower scene in Psycho) and threatens to kill him if he performs. Beef tries to flee, but plays with the band The Undeads (the former Juicy Fruits and Beach Bums) a glam/Goth act who all resemble Cesare the Somnambulist from The Cabinet of Dr. Caligari. As Beef performs, the Phantom, hidden in the rafters, strikes and electrocutes Beef (to the delight of the crowd). Horrified, Philbin orders Phoenix onstage and Phoenix is an immediate sensation. Swan seduces Phoenix in her dressing room and promises her stardom. As she leaves, she is suddenly captured by the Phantom. On the roof, the Phantom tells Phoenix his true identity and implores her to leave the Paradise so Swan won't destroy her. But Phoenix doesn't recognize or believe him and flees. At the Swan's mansion, the Phantom observes Swan and Phoenix in a tight embrace. Heartbroken, he stabs himself through the heart with a bowie knife. However, Swan tells the Phantom that he cannot die until Swan himself has died. The Phantom attempts to stab Swan, but Swan is unharmed. Looking down at Winslow, Swan hisses in an almost reptilian voice, "I'm under contract, too."
Rolling Stone announces the wedding between Swan and Phoenix during Faust's finale. The Phantom learns that Swan made a pact with the devil over 20 years ago: Swan will remain youthful forever unless the videotaped recording of his contract is destroyed, and photos age and fester in his place (from Oscar Wilde's novel The Picture of Dorian Gray). The tape reveals footage of Winslow signing his contract with Swan and a new one Swan made with Phoenix. On a live TV camera, the Phantom realizes Swan is planning to have Phoenix assassinated during the ceremony. The Phantom destroys all the recordings and heads off to the wedding. During the wedding, the Phantom stops the assassin from hitting Phoenix, who instead shoots and kills Philbin. The Phantom swings onto the stage and rips off Swan's mask, exposing him as a monster on live television. A crazed Swan gropes for Phoenix but the Phantom intervenes and stabs Swan repeatedly. In doing so, the Phantom's own stab wound reopens and he starts bleeding. As he is dying, Swan is carried around by the audience, who join in stabbing him. The dying Winslow removes his mask to reveal his own face and holds out a hand to Phoenix. Swan dies, allowing Winslow to die of his own wound. As Winslow collapses, Phoenix finally recognizes him as the kind man she met in line and embraces him in death.
- William Finley as Winslow Leach/The Phantom
- Paul Williams as Winslow's Singing Voice
- Paul Williams as Swan
- Jessica Harper as Phoenix
- Gerrit Graham as Beef
- Raymond Louis Kennedy as Beef's Singing Voice
- George Memmoli as Philbin
- Archie Hahn, Jeffrey Comanor, Colin Cameron, and Harold Oblong as The Juicy Fruits / The Beach Bums / The Undeads
- Rod Serling (uncredited) as Introductory voice