The Phantom of the Orchestra begins with an introduction and instructions by the narrator. The orchestra then plays the opening of Act II from Tchaikovsky's Swan Lake. As this piece reaches its final climax, the Phantom, a shadowy figure in mask and black cape, appears. In an operatic recitative he explains his problem: the orchestra's constant playing is keeping him from getting the sleep he needs. With his assistant, Gridley (played by a child age 8-11), the Phantom ponders his problem in an aria (music is Se Vuol Ballare, from Marriage of Figaro). He comes up with a diabolical scheme: If the orchestra plays badly, the audience will cancel all their subscriptions, and the ensuing financial difficulties will force the orchestra to disband, resulting in blessed silence.

Inspector Shamrock Jones is hired by Mr. Phipps, the orchestra's manager, to figure out why the orchestra is suddenly having so many problems in its performances. The manager explains that the rehearsals sound fine, it's the concerts where everything goes wrong. The orchestra (in "rehearsal") plays the Bach Air for the G String,.

Assured by the presence of the great Shamrock Jones, the orchestra then attempts to perform the Air. But the Phantom has written wrong notes in the parts of the winds, brass, and percussion, and the concert is ruined.

In response to the sabotage, Inspector Jones locks up the sheet music. After a perfect rehearsal of Meditation from Thais, the orchestra attempts another performance. But this time, the Phantom has put grease in the scroll of the concertmaster's violin, and he plays so out of tune that the concert is ruined yet again.

Manager Phipps and Inspector Jones then set up an all night watch to try to catch the Phantom. But the Phantom is again too clever for them; he places a suspense novel on the conductor's nightstand. The conductor stays up all night reading it, and falls asleep on the podium, ruining the concert yet again.

This last disaster results in the orchestra announcing its termination. The Phantom, hearing the news, sings a triumphal aria (Aprite un Po' Quegli Occhi from Marriage of Figaro) in which he revels in both his own cleverness and in how the hated musicians will all have to find new employment.

But Inspector Shamrock Jones finally catches up with the Phantom, and a chase ensues during the playing of the last movement of Beethoven's 7th Symphony.

Inspector Jones unmasks the Phantom, revealing the mystery to all (can't tell you here without ruining the surprise). The Phantom disappears back into the catacombs, but not before Inspector Jones resolves the Phantom's problem with the aid of some earplugs; they work well enough, but not without causing one more unplanned disaster, and not so well that we shouldn't expect a sequel!

All of the sequences where the orchestra briefly "plays badly" are designed to demonstrate various technical matters such as notation, intonation, and the role of the conductor.