The film begins at The House of Marvels, a doll museum, where Dr. Magrew, stuffs something into a crate, before driving into the woods and setting it on fire. The next morning, Magrew's daughter Jane, who has just returned home from college, asks her father about his assistant Matt. He tells her that Matt left because his father was ill. Driving into town, Magrew and Jane interrupt bully Joey Carp harassing Robert Winsley at a gas station. Jane finds a statue that Robert was carving, and Magrew offers Robert a job helping him with the Marvel show, which Robert accepts.
Returning home, they introduce Robert to Toulon's puppets, which are alive. Magrew says he tried to make a living puppet, but unsuccessfully, and asks Robert to help him carve the puppet. The next day, during the show, Sheriff Garvey and Deputy Wayburn tell Magrew that Matt is missing, and Magrew tells them he hasn’t seen him. Magrew gives Robert the blueprints for the puppet, instructing him to “put your soul into it". Robert begins carving and works non-stop.
One night, Robert has a nightmare that his legs have turned to wood. Later, Jane tries to distract him while working, causing him to cut himself. They flirt and end up kissing. That night, Robert has another nightmare that his entire body is wooden from the neck down. The next day, Jane and Robert drive to the woods, where they find the box that Magrew burnt at the beginning of the film.
Robert finds a carved wooden hand in the box. Meanwhile Jane walks off and encounters Joey and his friends, who sexually harass her. Robert arrives and defends Jane, but Joey threatens to rape her. Robert attacks Joey, but Jane pulls him away and they return to the house. Robert confesses that he felt a strange feeling while he was choking Joey, and Magrew tells him it was his violent inner self. Robert expresses fear that this self will appear again.
That night, Joey comes to the "House of Marvels" to beat Robert up, and decides to try again to rape Jane. Jane tells him to leave, and the doll Pinhead attacks Joey and chokes him, but Joey pulls him off and damages him. When Magrew and Robert arrive, Joey escapes. Magrew takes Blade and Tunneler to Joey's house and they kill him. Back at the house, Robert shows Jane that he fixed Pinhead, and they kiss. Returning, Magrew sees Robert coming out of Jane's room, and confronts her, becoming angry when she says she loves Robert, before leaving. Five days later, Jane finds Robert very sick. She asks her father to call the doctor, but he only pretends to. He then tricks Jane into leaving on a fool’s errand while he waits for the non-existent doctor to arrive. A medical examiner believes that Joey's death was intentional. Sheriff Garvey questions Joey's friend Art, who mentions seeing Joey with Jane in the woods. Sheriff Garvey and Deputy Wayburn go to question Magrew at the House of Marvels, but they are killed by the puppets as Magrew watches, laughing.
Jane discovers that her father has not ordered any new dolls for six months, and returns to the woods to examine the burned box. The puppet inside speaks to her in Matt’s voice. She realizes she has to save Robert, and returns to the House. At the house, Magrew puts Robert's soul into the puppet Tank, but the puppets attack him, angry that he killed Robert. Jane arrives to find her father bleeding to death, pointing at Tank, saying "I did it". Suddenly, the Tank puppet points its arm at Magrew and shoots him dead with a bolt of electricity. The film ends with Magrew screaming before death, and Jane screaming in horrified terror.
