In the midst of an unspecified disaster, Dr. Wrenn visits John Trent, a patient in a psychiatric hospital, and Trent recounts his story:

Trent, a freelance insurance investigator, has lunch with the owner of an insurance company, who asks Trent to work with his largest client investigating a claim by New York-based Arcane Publishing. During their conversation, Trent is attacked by a man with mutated eyes wielding an axe who, after asking him if he reads popular horror novelist Sutter Cane, is shot dead by police. The man was Cane's agent, who went insane and killed his family after reading one of Cane's books.

Trent meets with Arcane director Jackson Harglow, who tasks him with investigating the disappearance of Cane and recovering the manuscript for his final novel. He assigns Cane's editor, Linda Styles, to accompany him. Linda explains that Cane's stories have been known to cause disorientation, memory loss and paranoia in "less stable readers". Trent is skeptical, convinced the disappearance is a publicity stunt. Trent notices red lines on the covers of Cane's books, which, when aligned properly, form the outline of New Hampshire and mark a location alluded to be Hobb's End, the fictional setting for many of Cane's works.

Linda experiences bizarre phenomena during the late-night drive, and they inexplicably arrive at Hobb's End in daylight. Trent and Linda search the small town, encountering people and landmarks described as fictional in Cane's novels. Trent believes it all to be staged, but Linda disagrees. She admits to Trent that Arcane's claim was a stunt to promote Cane's book, but the time distortion and exact replica of Hobb's End were not part of the plan.

Linda enters a church to confront Cane, who exposes her to his final novel, In the Mouth of Madness, which drives her insane; she begins embracing and kissing a mutated Cane. A man who had previously attempted to stop Cane's insidious agenda approaches Trent in a bar and warns him to leave, then commits suicide, proclaiming to merely be "a character written to do it." Outside, a mob of monstrous-looking townspeople descend upon Trent. Trent drives away, but is repeatedly teleported back to the center of town. After crashing his car, Trent awakens inside the church with Linda, where Cane explains that the public's belief in his stories freed an ancient race of monstrous beings called "The Old Ones" which will reclaim the Earth. Cane reveals that Trent is merely one of his characters, who must follow Cane's plot and return the manuscript of In the Mouth of Madness to Arcane, furthering the end of humanity.

After giving Trent the manuscript, Cane tears himself and a wooden door behind him open as if they were paper, creating a portal to the dimension of Cane's monstrous masters. Trent sees a long tunnel that Cane said would take him back to his world, and urges Linda to come with him. She tells him she can't, because she has already read the entire book. Trent races down the hall, with Cane's monsters close on his heels. He suddenly finds himself lying on a country road, apparently back in reality. During his return to New York, Trent destroys the manuscript. Back at Arcane, Trent relates his experience to Harglow. Harglow claims ignorance of Linda; Trent was sent alone to find Cane, and the manuscript was delivered months earlier. In the Mouth of Madness has been on sale for weeks, with a film adaptation in post production. Trent then encounters a reader of the newly released novel, who is bleeding from his altered eyes; Trent murders him with an axe. Trent is then arrested for murder and sent to the asylum.

After Trent finishes telling his story, Dr. Wrenn judges it a meaningless hallucination. Trent wakes the following day to find the asylum abandoned, and he departs as a radio announces that the world has been overrun with monstrous creatures, including mutating humans, and that outbreaks of suicide and mass murder are commonplace. Trent then goes to see the In the Mouth of Madness film where he discovers that he is the main character. As he watches his previous actions play out on screen - including a scene where he insisted to Linda "This is reality!" - Trent begins laughing and crying hysterically, finally realizing that he is just a work of fiction.
Cast

    Sam Neill as John Trent
    Julie Carmen as Linda Styles
    Jürgen Prochnow as Sutter Cane
    David Warner as Dr. Wrenn
    John Glover as Saperstein
    Bernie Casey as Robinson
    Peter Jason as Mr. Paul
    Charlton Heston as Jackson Harglow

In addition, Frances Bay plays Mrs. Pickman, while Wilhelm von Homburg appears as Simon. Hayden Christensen makes his film debut, briefly seen as a paper boy.