Warning: Wikipedia contains spoilers
The story follows a private investigator, played by Sam Neill, whose specialty is insurance fraud. He is called in by his client to investigate the disappearance of a phenomenally popular horror novelist named Sutter Cane, whose books are hotter than even Stephen King's. Cane has supposedly vanished as his most recent novel is nearing its deadline, and his publisher (played by Charlton Heston) wants to retrieve his company's property. Neill's character, however, thinks the whole thing is merely a publicity stunt for the new novel.
Neill, along with Cane's editor (played by Julie Carmen), eventually track the writer down to a remote New England town that seems to have come directly out of one of Cane's stories. There it soon becomes clear that the wall between fantasy and reality is blurring.
This becomes central to the movie's satirical themes, which focus on the relationship between writer and audience in a way that comments ironically upon oft-stated fears that violent entertainment can have a psychological effect on its audience, causing them to lose touch with reality and develop violent behavior. (As in the Columbine High School shootings years later, where video games and rock music from artists like Marilyn Manson were among the factors blamed for the killers' rampage.) Fans of Cane's are shown rioting in bookstores when they are unable to find his latest novel, and by the end of the movie we learn that society itself has collapsed due to random acts of violence and mass hysteria.
The film also serves as a tribute to the work of seminal horror writer H.P. Lovecraft, with many references to his stories and themes. The title is a play on one of Lovecraft's most famous tales, "At the Mountains of Madness", and insanity plays a large role in the film as it does in Lovecraft's fiction. (The film's opening scene shows Neill being hauled into an asylum, with the bulk of the story told in flashback.) Also, there is a quick reference to the Old Ones of Lovecraft's Cthulhu Mythos, and some locations in the script are references to his stories as well. And yet it would be a mistake to call In the Mouth of Madness a "Lovecraft film" in the strictest sense; it is a Lovecraft pastiche.
After a long dry spell in which it looked as if his career were in serious jeopardy, Carpenter enjoyed his first spate in years of mostly positive reviews for Madness. And yet its box office performance was only mediocre, grossing around $10 million total.