NOTE: This spoiler was sent in by Rae.
Jamie Ashen and his wife Lisa receive a package in the mail, with no return address It contains a ventriloquist's doll, named Billy. Jamie goes out to get food and Lisa decides to scare him by placing Billy on the bed and covering him with a sheet. She walks up to the mirror and places a blanket under her shirt at the stomach (this is VERY IMPORTANT) and smiles. While walking through the apartment all of the sound stops--the tea kettle stops whistling, the music stops playing, and the clock stops ticking. She walks to the bedroom and uncovers Billy--you see her scream and the scene ends. Jamie comes back to the apartment and hears Lisa's voice say, "I've got a surprise for you, Jamie!" He walks into the bedroom and sees blood all over the floor, rips the sheet off of the figure on the bed (in the exact place where Lisa had put Billy) and sees Lisa with her tongue ripped out. Billy is on the floor.
Jamie is now in the police station being interviewed by Decetive Lipton, who says that Jamie is the main suspect in this case. Lipton seems to have some sort of compulsive shaving habit. He advises Jamie not to leave town.
James returns to his apartment and walks into the living room and peels away the material inside the box Billy came in to find "MARY SHAW AND BILLY IN RAVEN'S FAIR."
Jamie goes back to his hometown, Raven's Fair, to arrange her funeral, and brings the doll with him. We are introduced to his father, who is in a wheelchair, and his new stepmother, his father's trophy wife. The two live in a huge mansion outside of town. Jamie confonts his stepfather and is told he was sent away for his own safety. Jamie leaves and his stepmother follows him out. Jamie points to two family portraits, the first of which has Jamie in it, and both have his father but his wives have been painted out in each. He says that "you'd better outlive him lady, so there'll be nobody to paint you out too."
At some point when Jamie heads back to a motel he finds that Detective Lipton is staying in the room next door to him and reminds him that he'd advised him not to leave town. He takes Billy as "evidence."
After heading to the town mortician Jamie learns that his wife is not the first to suffer this fate--many other families have succumed to the curse of Mary Shaw, found with their tongues ripped out and posed family-portrait style. Henry, the mortician, says that when he was a boy his father was the mortician who worked on Mary Shaw after she died.
Apparently her will stated that she not only wanted to be buried with her dolls, but that she wanted to be made into a doll. Late at night as a boy Henry went downstairs and looked into the coffin with Mary Shaw inside, and it tipped over. Mary fell onto him on the floor and he saw her as a doll with creepy eyes and a moving moth and a stick in her back. Moments later we see Mary the doll floating in the air, arms outstretched toward him, and Henry's father then opens the door and turns on the light. Mary is back on the floor where she fell.
Jamie passes the mortician's crazy wife on the way out. He drives to the cemetry to visit Mary Shaw's grave and is followed by the crazy wife, who tells him that Mary Shaw is back. Henry comes out to bring her back home.
Henry's wife is fond of hiding inside a crawlspace and talking to herself, and at one point we hear her voice coming from the crawlspace. Henry goes inside to find her and the door closes behind him. Billy comes out and talks to him, at which point Henry screams and has his tongue ripped out. He falls out of the door to the crawlspace into the hallway (it's anyone's guess at this point as to how the door is magically unlocked) and his wife finds him.
After finding Henry this way, Jamie drives home to see his father. He asks about Mary Shaw. We learn that Billy belonged to Mary Shaw, a ventriloquist. Shaw was heckled by Jamie's great uncle during one of her shows (saying very loudly that he could see her mouth move when she made Billy "talk") and went missing a week after. Townspeople (The Ashen family and a few assorted others) hunted Shaw down and made her scream so that they could chop her tongue out.
Detective Lipton finds Jamie and tells him that he went to find Billy after Jamie had buried him back in the graveyard with Mary Shaw and her dolls. Lipton says that all of the dolls were dug up. Jamie finds out, along with Detective Lipton, that Mary lives through the dolls. Jamie also finds out that if you don't scream when you see Mary Shaw, she won't kill you.
Jamie and Lipton go to the theater where Mary performed and they learn from a creepy clown dummy that Mary is killing every Ashen and everyone who aided the Ashen family in murdering her. Jamie demands to know why Lisa (his wife) was killed and the clown says he'll tell Jamie if he comes closer. Jamie walks closer and turns his head and the clown whispers, "SHE WAS CARRYING THE LAST ASHEN." (She was pregnant, if you haven't guessed.)
Jamie finds his great uncle's still adolescent body, decrepit and attached to strings like a marionette. He also finds all 100 of Mary's dolls, with Billy being the 101st. Lipton shoots all of the doll cases as Mary tries to come out of the dolls and the cases catch on fire, destroying all of them but Billy, who is not in his case. As the two men try to escape the theater, Lipton falls off of the catwalk and screams and his tongue is ripped out. Jamie does not, and gets back to his car. He decides to destroy Billy, the last doll, which is back at his father's mansion.
He goes back to the mansion and finds it empty. He finds Billy and picks him up, only to have Mary charge him from the darkness. He tosses the doll into the fireplace and Mary screams, and disappears.
Lightning strikes and Jamie sees his father, completely still, in his wheelchair in the corner. He walks to him and touches his shoulder. The father falls forward and we see a huge hole in his back with a stick attaching to his mouth and reaching down the where his spine should be. He has been made into a "human dummy". The music from the end of Saw plays, and we flash back to every scene to see that everytime Jamie saw his father, the stepmother was controlling him like a ventriloquist.
We then see, in Mary's sketchbook. the sketch of the perfect doll: Jamie's Stepmother. Jamie, shocked by his father's condition, turns to see the stepmother. Jamie screams and the stepmother turns into Mary Shaw and kills him.