George Newman ("Weird Al" Yankovic) is a daydreamer whose hyperactive imagination keeps him from holding a steady job. The opening sequence is one of George's daydreams as a spoof of the opening scene of 'Raiders of the Lost Ark' with George as Indiana Jones venturing to a temple to steal a gold Academy Award statue and being chased, run over and flattened by a giant boulder. Awaking from his daydream, George and his best friend and roommate Bob (David Bowe) are working at a Big Edna's Burger World, a local fast food eatery in the small Midwest town where they live. When George makes a disparaging remark about Big Edna and she hears it, both George and Bob are fired and litteraly thrown out onto the street.
George's inablity to keep a steady job puts a strain on his long-suffering girlfriend Teri (Victoria Jackson) who tolerates his antics to a limit. George and Teri go to his uncle and aunt's house for a party where his compulsive gambling uncle Harvey Bilchik (Stanley Brock) wins the deed to a nearly bankrupt UHF television station in a poker game. After prodding by his wife, Harvey gives control of Channel 62 to George so he can manage the place.
The next morning, George and Bob arrive at the station and meet the Channel 62 staff which is made up of the receptionist and wannabe reporter Pamela Finklestein (Fran Drescher), dwarf photojournalist and cameraman Noodles MacIntosh (Billy Barty), and eccentric engineer Philo (Anthony Geary). George attempts to introduce himself to the rival VHF network Channel 8 station but its owner, the mean and cynical R.J. Fletcher (Kevin McCarthy), chases him out angrily. On his way out of the station he encounters janitor Stanley Spadowski (Michael Richards), a mentally challenged man who was recently fired by Fletcher. George offers him a job at Channel 62 as the head janitor.
Seeing that Channel 62 airs mostly old re-runs of classic TV shows such as Mr. Ed and the Beverly Hillbillies, George sees that the station can use a lot more talent. Though George creates new shows (including the kid-friendly but poorly named "Uncle Nutzy's Clubhouse"), the workload and bad debt of the station get to him. Amid the stress he forgets Teri's birthday, causing her to break up with him over the incident. A despondent George turns "Uncle Nutzy's Clubhouse" over to Stanley so he and Bob can go out for a drink. Arriving at the bar, they find that all the patrons are excitedly watching Stanley's antics on Channel 62. Realizing they have a hit on their hands, George and Bob are revived and inspired. They come up with ideas for more original shows in Channel 62's lineup, all spearheaded by the newly retitled "Stanley Spadowski's Clubhouse."
Throughout the film, there are cutaway scenes that are comic homages to popular shows of the time, through either George's imagination or shows specifically for Channel 62. For example, a dream sequence includes a music video for Yankovic's "Money for Nothing/Beverly Hillbillies" in both the audio and visual style of the Dire Straits' "Money for Nothing", and fake commercials for 'Plots 'R Us Mortuary Service', 'Crazy Eddie's Car Lot', and 'Spatula City', as well as fake commercials for Channel 62's new TV series such as 'Gandhi II', 'Conan the Librarian', 'Bowling for Burgers', an exercise show called 'Stay Fit', a game show called 'Strip Solitaire' hosted by Noodles, 'Practical Jokes and Bloopers', and 'Celebrity Mud Wrestling'. Kuni (Gedde Watanabe), a local and eccentric Karate instructor, becomes the host of the odd game show "Wheel of Fish". Philo becomes host of his own talk show series "Secrets of the Universe". George sets up a re-vamped talk show called "Town Talk" with him as a Gerraro Reveria-type host seeking controversial talk subjects. Raul (Trinidad Silva) is hired for an animal show called "Raul's Wild Kingdom" where he talks to (and abuses) animals that he keeps in his apartment.
As Channel 62's popularity grows, Fletcher becomes furious that a UHF station is getting better ratings than his network's programming. He learns that Harvey Bilchik is the owner of the station and has just gambled away $75,000 at the horse races and has only two days to pay off the debt. Fletcher makes Harvey the offer of covering his debt to his unseen bookie, Big Louie, in return for ownership of Channel 62, which he would then only too happily shut down (legally he cannot own two stations in the same town). George learns of the deal and calls his aunt, who forces her husband to hold off and allow George time to raise the money Harvey owes by selling investment stock in Channel 62 through a 48-hour telethon.
The telethon starts off successfully led by Stanley's boundless energy, but Fletcher sends his goons to kidnap Stanley. Without Stanley, the telethon grinds to a halt. George then leads a group to infiltrate Channel 8 and rescue Stanley. Philo sets up a hidden camera in Fletcher's office hoping to find something to nail him on. When he sees Stanley trying to escape, he alerts George who attempts to rescue Stanley, while imaging himself as Rambo in a long fantasy spoof of 'Rambo: First Blood Part 2' with features George (as Rambo) who attempts to rescue Stanley from Fletcher's private army. Kuni and his school of Karate students also step in to complete the job and beat up all of Fletcher's henchmen.
George and his group return in time to successfully finish the telethon just before Harvey's debt comes due, saving the station and making it a publicly owned company. Fletcher on the other hand finds out that the penny he mockingly gave to a beggar earlier was a rare 1955 doubled-die cent worth thousands, which the beggar sold and used to purchase $2,000 worth of Channel 62 stock. Fletcher also discovers that a slanderous conversation of his contempt for his station's viewers was secretly recorded and rebroadcast by Philo and that Channel 8 failed to file paperwork to renew its broadcast license with the FCC. The FCC revokes his license and takes the station off the air. Phil is secretly revealed to be an alien and seeing that his work for Channel 62 is complete, teleports away unnoticed to his home planet.
As the film ends George and Teri rekindle their relationship (in a spoof of the Rhett-Scarlett farewell speech from the movie 'Gone With The Wind'), while the rest of the employees and fans of Channel 62 celebrate.