A young woman (Daniela Doria) in an old abandoned house is looking for her boyfriend Steven who has taken her there for sex. The young woman discovers her boyfriend's horribly mutilated dead body when she gets stabbed through the back of her head with a sharp kitchen knife by an unseen person. The killer drags the woman's body through a door leading to the cellar.
New York City, several months later. A young boy named Bob (Giovanni Frezzi), and his parents Norman and Lucy Boyle (Paolo Malco and Catriona MacColl) are preparing to move to a new house in New England just outside Boston previous occupied by Normans ex-colleague, Dr. Peterson, who recently murdered his mistress before committing suicide. The Boyles are to spend six months at the house, whilst Norman finishes his research project of old houses at the request of his employer Professor Muller (director Lucio Fulci). As his mother packs, Bob looks at the photograph of a sinister-looking old house, hanging on the Boyles wall. In it, he sees a young girl warning him to stay away.
In New Whitby, Boston, Bob waits in his parents car while they pick up their house keys at the estate office. He makes further contact with the girl in the photo, who this time appears across the street. Despite the distance between them, Bob and the girl (Silvia Collatina), who introduces herself as Mae, can hear each other without opening the car windows. Mae again warns Bob to stay away. In the real estate office, the friendly Mrs. Gittelson (Dagmar Lassander) is annoyed with her laconic colleague Harold, who hands the couple "the Freudstein keyes." "It's Oak Mansion, Harold," she insists. She seems to recognize Dr. Boyle and asks him if hes been to New Whitby before. Norman says that he hasn't. Accompanying the family to Oak Mansion, Mrs. Gittelson promises to arrange for a babysitter to drop by. Lucy is struck the by the resemblance between the house in the photograph and their new home. But Norman seems strangely disinterested.
Inside, the old house is spacious, but in a poor state of repair. They notice in the kitchen that the cellar door is locked and nailed shut. As they start unpacking, a strange young woman arrives and introduces herself as Anne the babysitter (Ania Pieroni). That night, Norman hears noises and on rising to investigate, finds Anne unblocking the cellar door. The next day, Norman goes to the local library to look over Dr. Petersons materials. Mr. Wheatley the librarian (Carlo De Mejo) also seems to recognize him and asks if he's been to the town before. Norman again replies that he has not. The assistant librarian Daniel Douglas (Giampaolo Saccarola) informs Norman that Dr. Peterson has conducted private research at the old house. Hed been studying records of disappearances in the area over the last several years as well as medical reports and death certificates, none of which has any relevance to his official studies.
In the wild undergrowth around the house, Mae shows Bob a tombstone bearing the name of Mary Freudstein and says that the woman is not really dead. Indoors, Lucy finds a tombstone set into the floor. It bears the name Jacob Tess Freudstein. Scared and confused by her discovery, she hears noises emanating from all over the house and breaks down screaming. When Norman returns home, he reassures his distraught wife that its quite normal for some old houses in the region to have indoor tombs, because of the hard wintery ground. Producing a set of keys and a flashlight, Norman opens the cellar door and proceeds to walk down the stairs only be attacked by a large bat, which sinks its teeth into his hand and proves incredibly hard to get off. Norman stabs at its loasome pulpy body over and over in which the things oozes globs of blood before dropping dead to the kitchen floor. Now completely spooked, the family drives down to the estate officce where they demand to be rehoused. Their demands are met with exaggerated yawns from Harold. They are told they will have to wait just a few more days before they can move somewhere else. "That Freudstein place" he intones as they leave.
The next day while the Boyles are at the hospital to look over Norman's injury caused by the bat, Mrs. Gittelson arrives at the house to tell the family that a property has been found for them. When no one answers her knock, she lets herself in. When she casually stands on the Freudstein tombstone, it cracks apart, grinding her ankle. As she struggles to free herself, an apparently cadaverous figure (unseen except for a normal left arm and a rotting right forearm) emerges from the cellar and attacks her with a fireplace poker, stabbing her repeatedly in the neck. Mrs. Gittelson bleeds to death when blood jets from her multiple wounds and she's dragged to the cellar.
The next morning, Lucy finds Anne scrubbing up a huge bloodstain on the kitchen floor leading to the closed cellar door. When asked what she is doing, Anne is noncommittal and eludes Lucy's attempts to talk. At a local coffee shop in town, Norman tells Lucy that he's discovered that the mysterious Dr. Freudstein was a turn-of-the-century surgeon with a penchant for illegal experiments. Norman tells Lucy that he will be traveling back to New York for more research on Dr. Freudstein, telling Lucy that he will be away until well after nightfall. On the way, Norman drops by the library and finds a cassette recording of Dr. Peterson, whos deranged ramblings explain the horrific circumstantial which drove him to suicide. He was not the killer of his mistress and children, but the ghoulish Dr. Freudstein was.
Back at the house, Anne goes down into the cellar looking for Bob, when she is attacked and decapitated by the still-unseen Dr. Freudstein. Bob goes down to investigate, when he sees Anne's severed head come rolling down the metal stairs and runs back screaming, just in time to avoid being shut in with the monstrous denizen. Lucy at first refuses to believe the frantic Bob's wild tale about Anne being killed. However, Lucy cannot find any trace of Anne anywhere in the house. That evening, after his mother has gone to bed, Bob returns to the cellar with a flashlight to look for Anne. The door behind him slams shut, and glowing eyes peer at him from the darkness.
Lucy is woken up by Bob's frenzied shrieks for help, and she tries to open the cellar door. The key snaps. Lucy tries using a knife as jimmy, but it too snaps. As Lucy panics, Norman arrives back and attacks the cellar door with an axe. On the other side, the rotting hands of Dr. Freudstein (Giovanni De Nava) appear and hold Bob's head to the wooden panels. Normans axe blows come dangerously close to Bob's head, missing his son by a fraction of an inch. One blow chops off the monster's left hand, and he staggers away in pain from the door, dragging the unconscious Bob with him. At last, the cellar reveals its secrets opening up in full view to reveal a charnel house of mutilated bodies, its shadowy recesses dotted with surgical equipment and a gore-streaked pathology slab. The horribly deformed Dr. Freudstein is shown as a rotting living corpse with shrunken in eyes, and rotting flesh. As the couple ventures into the cellar to rescue their son, Norman breathlessly fills Lucy in on the details of his find. The 150-year-old Freudstein has apparently discovered a way of keeping himself alive by using the hacked up body parts of his victims to regenerate his blood cells. Norman attempts to attack Freudstein, but the revolting-looking ghoul twists the axe from Norman's grip. Norman then grabs a knife off the surgical tray and rams it into Freudstein's gut releasing a sickening stew of maggots and corrupted blood. Although wounded, the monstrous Freudstein continues to attack. Lucy and Bob watch in horror as Freudstein picks up Norman and literally ripps his throat out with his one rotting hand. Lucy and Bob spot a metal ladder in the corner of the basement which leads up to the cracked tombstone in the living room floor. With the ghastly monster standing between them and the cellar door, their only hope is to climb up the metal ladder and try to push apart the two stone segments to escape. Lucy strains desperately to shift the stone, but her ankle is grabbed by the perusing Dr. Freudstein. As Bob clings to the topmost rung, he sees his mother pulled down, her head battered by each metal step down. Freudstein finishes off Lucy by ramming her head into the concrete cellar floor, splattering it like a melon. As Freudstein advances up the metal latter to the helpless Bob, the little boy strains to escape by forcing his head through the jagged aperture. At the last minute, as Freudstein clutches the boy's ankle, Bob is yanked up and out of reach by unseen hands to find Mae standing before him. But with Mae is the 19th Century figure of her mother, Mary Freudstein (Teresa Rossi Passante), who gently urges them to leave for other people will no doubt drop in for her husband's continuing research for eternal life. Mrs. Freudstein leads Mae and Bob away from the house and down the wintery grove into a netherworld of ghosts and sadness.