Jamie Ashen and his wife Lisa receive a mysterious ventriloquist doll in the mail, 'Billy', in an unmarked package with no return address. Jamie and Lisa ponder who would have sent the doll, and Jamie leaves to get dinner. Jamie returns to discover Lisa is dead with her tongue ripped out, and Billy is lying on the floor near her body. Detective Jim Lipton suspects Jamie of the murder, but there is no evidence against him. Jamie returns to his apartment and discovers that Billy belonged to Mary Shaw, a ventriloquist from his hometown of Ravens Fair.
Returning to the town for Lisa's funeral, he first confronts his estranged father about Mary Shaw. Jamie's father has suffered a stroke and is now wheel-chair bound, and he has a new wife, Ella, who takes care of him. His father and Ella remind him of the children's poem regarding Shaw and her penchant of cutting out her victims' tongues. "Beware the stare of Mary Shaw, she had no children - only dolls; and if you see her in your dreams, be sure you never, ever scream." Jamie leaves his fathers home, warning Ella that his father is a monster. After Lisa's funeral, Jamie wanders into an old cemetery where he finds Shaw's grave and those of her puppets. Marion, the senile wife of the mortician, warns him of the danger of Shaw's puppets, and he realizes he should rebury Billy[The puppet]. He does so, only to find the puppet in his room later in the night, accompanied by Lipton, still not convinced of Jamie's innocence. Jamie tells him about the poem, but Lipton is skeptical. The next morning Jamie steals Billy from the detective, and he brings him to the mortician, Henry, who finally tells him about Mary Shaw.
Shaw was a famous ventriloquist whose ambition was to make the perfect puppet. One night at a performance, a young boy heckled her, claiming that he could see Mary's lips moving. Mary quickly rebuffed this by presenting herself and Billy talking at the same time, and impressed the entire audience. Michael went missing shortly after. While his body was never found, Shaw was blamed, and the Ashen clan murdered her by cutting her tongue out. Her final wish was to turn her body into a ventriloquist's puppet and to be buried with her 101 puppets. Henry, at a very young age, wandered into his fathers mortuary and accidentally knocked the coffin over. Shaw's body came to life and she began approaching Henry. He survived because he covered his mouth to keep from screaming; Mary can only kill her victims when they scream. Henry's father then burst into the room, and discovered Henry cowering in the corner and Shaw's body on the floor.
Jamie investigates the theater and finds Shaw's dressing room. He discovers an old book with plans to make the perfect puppet. Jamie confronts his father later in the night and learns that the missing boy was his great-uncle. His father tells him that the boys family murdered Shaw by forcing her to scream and then ripped out her tongue. The men involved where then killed off one by one, found with their tongues ripped out. Their wives, children, and children's children all suffered the same fate. His father then tells him Shaw will come back for himself and Jamie as well. Lipton then arrives and tells Jamie that Shaw's grave has been exhumed and that all of her puppets are missing. Jamie then receives a phone call from Henry, telling him to go to the theater. With the detective following close behind, Jamie returns to the theater and Shaw's living quarters. Discovering a hidden back room that Jamie didn't locate the first time, they find the body of Michael Ashen, strung up like a marionette, and 100 of Shaw's puppets placed in cases on the wall. Mary Shaw did kill the little boy. Suddenly, one of the dolls begins talking to them. The doll, possessed by Shaw, tells them she wants to silence those who silenced her, and that she killed Lisa because she was pregnant.
Shaw herself appears behind the doll but Lipton shoots the doll and she disappears. She then begins materializing via the other dolls. After setting the room on fire, they run from the theater with Shaw's ghost chasing them. When the catwalk in which they are running collapses, Shaw kills Lipton in mid-fall after he screams. Jamie, however, continues to climb upward on the collapsed catwalk, only to be greeted by Mary Shaw when he reaches the top. He falls through the floor of the theater and lands in the lake on which the theater was built. Grabbing the fallen flashlight, he makes his escape. The theater burns down, destroying all of Shaw's dolls and puts an end to her reign of terror.
After he drives away, Jamie realizes that Billy is the only remaining puppet, and that the only way to get rid of Shaw is to destroy him. He goes to Henry, with who he had left Billy, only to discover that he is dead with his tongue ripped out. After his wife tells Jamie that his father took the doll, he returns to his father's house to destroy Billy. When he arrives, Mary Shaw reappears, but is forced to retreat when Jamie throws Billy into the fireplace. As she is forced back into the shadows, Jamie finds his father sitting in his wheelchair, staring blankly into space. As he approaches him, Jamie is horrified as he discovers his father is dead with his entire back hollowed out and replaced with a wooden shaft used in ventriloquist dummies. Jamie realizes his Father had been wearing the same suit the entire time, and Ella had been at his side the entire time with her hand behind his back. He realizes that Ella is the perfect puppet that Shaw strove to make and has been using the elder Ashen's corpse as a puppet to lure Jamie. Ella heckles Jamie and reveals herself as the ghostly Mary Shaw in disguise. Jamie screams and Mary Shaw takes his tongue, killing him. The movie ends with the poem being recited as Shaw is looking through a scrap book with the pictures of her recent victims turned into dolls.