On the morning after his re-election, US President Joseph Staton (Dennis Quaid) decides to read the newspaper for the first time in four years. This starts him down a slippery slope. He begins reading obsessively, reexamining his "black-and-white" view of the world in a more "gray-seeming" way, and holing up in his bedroom in his pajamas. Frightened by the President's apparent nervous breakdown, his Chief of Staff (Willem Dafoe) pushes him back into the spotlight, booking him as a guest judge on the television ratings juggernaut (and the President's personal favorite), the weekly talent show American Dreamz, a show similar in format to the modern-day American Idol.
America cannot seem to get enough of American Dreamz, hosted by self-aggrandizing, self-loathing Martin Tweed (Hugh Grant), ever on the lookout for the next insta-celebrity. His latest crop of hopefuls includes Sally Kendoo (Mandy Moore), a conniving steel magnolia with a devoted, dopey veteran boyfriend William Williams (Chris Klein), and Omer Obeidi (Sam Golzari).
Because Omer's mother died in the Middle East in an American attack, he joined a group of jihadists. He was an actor in an instruction film for terrorists, but he was too clumsy, and his interest in Western music was frowned upon. Therefore he was sent to the U.S. to await further instructions, but the leaders expected they could not use him. He moved to Southern California to live with his extended family there, including his effeminate cousin Iqbal (Tony Yalda) and Shazzy (Noureen DeWulf). Iqbal hoped to be selected to participate in American Dreamz, but in a misunderstanding Omer was selected instead. Iqbal becomes his manager.
Omer's terrorist organization now sees an opportunity: Omer is instructed to make it to the finale, and kill the President in a suicide attack. He succeeds in getting to the finale. Security is bypassed by assembling the bomb after the security check, in the toilet, from small parts smuggled in. Small pieces of explosive are disguised as chewing gum. Omer agrees, but changes his mind and disposes of the bomb in the trash can.
Sally is the other finalist. Earlier she dumped William. He went into the army, was wounded in Iraq, and came back to the U.S. For the purpose of the show, Sally pretends she still loves William. However, he sees Sally having sex with Martin, and is furious. After he finds the bomb in the trash can, he comes on stage and threatens to detonate it. While the other people evacuate, William starts singing and Martin, who refuses to let go of the camera, films it. As William reaches the end of the song, he detonates the bomb by walking into the camera, killing both himself and Martin. The film then cuts to shots of people dialing up their cell phones to vote in for the winner. It is eventually revealed that William Williams is the surprise winner of American Dreamz.
The end of the film reveals what each of the characters went on to do after the end of last season. Omer went on to become a successful star of his own Broadway revue. At the end of the film he appears in a scene from the musical Grease. The President makes his wife his new Chief of Staff. And Sally Kendoo becomes the new host of American Dreamz.