The movie opens with Captain Elliott Spencer (Doug Bradley) playing with the Lament Configuration box, only to have it send him to Hell and transform him to the Cenobite "Pinhead". Flash forward to the present, where Kirsty Cotton (Ashley Laurence) is placed inside the Channard Institute, a psychiatric hospital, and is questioned by Homicide Detective Bronson (Angus MacInnes). After the police search the house where her father, Larry, her stepmother Julia and her uncle, Frank, all died, they stumble upon the bloody mattress Julia had died upon (from the first film) and bag it as evidence. Kirsty meets Dr. Phillip Channard (Kenneth Cranham) and his assistant Kyle MacRae (William Hope) and she tells her story. Before leaving, Kirsty begs Bronson to burn the mattress as it is the only means of bringing Julia back from Hell. Channard goes and talks to Bronson.
During her first night, she has trouble falling asleep when she comes across a young girl named Tiffany (Imogen Boorman), who has a knack for solving puzzles and has been institutionalized for six months. Kirsty has trouble falling asleep as she begins to hear voices and receives a bloody message written on the wall from a skinless human whom she believes is her father: "I AM IN HELL. HELP ME." Kirsty explains the entire story to Channard after she expresses to Kyle that her father may still be alive.
The film then cuts to Channard at his home, revealing that he has stolen the mattress. Kyle sneaks to his house to find that Channard is obsessed with the Lament Configuration box and the portal to Hell. Kyle watches from behind a curtain as Channard brings back a masochistic patient from the ward, handing him a straight razor. The patient slashes himself several times, bleeding onto the mattress. After a few moments, a skinless body emerges from the mattress, draining the masochist. The body in the mattress is actually Julia, whom Channard is trying to resurrect with the promise of learning about the afterlife. Channard brings more corpses to his attic where he hides Julia. After a few victims, she has much of her skin back. Kyle goes back and informs Kirsty about what he saw and that he now believes her. They go to the house together, as Kirsty finds a picture of Spencer before he'd become Pinhead. Kyle runs into Julia: at first he has no idea who she is. Julia locks herself with Kyle in Channard's attic, where the corpses of Julia's victims hang rotting. Julia approaches him and envelopes him with her arms. At first, the weak-willed Kyle has no idea who she is, but then he realizes she is the skinless, monstrous thing that destroyed the mental patient on the mattress. Kyle panics and tries to escape, but Julia's grip prevents him from doing so. Julia makes as if she's kissing Kyle, and works him through a process of sucking him dry. Kyle struggles poignantly to get rid of her grip, but is worked out calmly and effectively by Julia. He screams and moans in pain, and does try to escape from her arms, but Julia is stronger now. As this process of nourishment goes on, Julia gets to recover the whole skin of her back. As she finishes, Kyle has passed out from the struggle and the suffering at the arms of Julia. She relaxes her grip over him, and a bleeding, sucked dry Kyle slowly falls to the ground as a defeated, humiliated husk. Julia and Kirsty finally meet again, and Julia smacks Kirsty as Channard brings another patient: Tiffany.
The next scene shows Tiffany is not actually another victim, but is merely being used to open the puzzle box so Channard can experience Hell. The tunnels of Hell are opened and the Cenobites are released, but Pinhead stops the others from killing Tiffany, for he notes that it is not her desire that made her open the box but Channard's. Channard and Julia have both entered the tunnels themselves and begin to explore. Kirsty wakes up and, after seeing what has happened, heads for Hell with the box. When she arrives there, Pinhead finds her and changes the configuration of the box into a shape that appears unsolvable. Kirsty takes the puzzle with her, seeking Tiffany to solve it.
Julia introduces Channard to the god of the box's realm, which is a series of pathways that form a strange maze. Leviathan, the god of the realm, represented by a much larger version of the puzzle box in the configuration Pinhead changed it to for Kirsty, revolves at the center of the maze. Channard sees the horror of Leviathan's Hell and realizes it's beyond his comprehension. When he tries to leave, Julia forces him into a much larger version of the box, where he endures unimaginable pain when his face is strung with wires. He emerges from the box some time later, now a Cenobite. A large tentacle painfully grips the top of his head and becomes his new form of mobility.
Kirsty eventually finds Tiffany, and they both try to find an exit. Kirsty sees her father's house, and runs in thinking her father might be inside, but it turns out to be Frank. He is the one who sent Kirsty the message, wanting Kirsty to join him. Frank presides over his own chamber of Hell where sheeted women taunt him, never allowing him any pleasure from them. He tries to attack Kirsty and she responds by burning down the house, as well as Frank's flesh. Julia enters with Tiffany, and Frank motions her to kiss him. Julia betrays him, ripping his heart out as the girls make their escape. The girls try and get sucked through, but Julia catches them and grabs onto Tiffany before she is pulled out of her skin.
Kirsty and Tiffany make their escape back to the hospital, but the Channard Cenobite finds them and gives chase again. Kirsty encounters Pinhead, Butterball, Chatter, and the Female Cenobite. Kirsty gives Pinhead the picture of Elliot Spencer and reminds them that they were all human at one time, until pain got the better of them. The Channard arrives to capture Tiffany, while the remaining Cenobites all choose to protect Kirsty. Channard kills all the Cenobites (reverting them back to human form) and turns Pinhead's face into Elliot. Elliot smiles at Kirsty and allows her to escape before succumbing to his death; Channard uses strange tentacles with sharp blades to slit Elliot's throat.
Tiffany decides to go back into Hell and finish what was started. Kirsty follows as well, but understands that it's all a puzzle. Tiffany attempts to solve the puzzle, but Channard interferes and attacks both girls. Kirsty retreats. As Channard stalks Tiffany, Julia reappears and distracts him with a kiss, long enough for Tiffany to solve the puzzle. As he tries to kill Tiffany, the Channard's tentacles become embedded in the floor and his mobility tentacle rips the top of his head off at the jaw. Tiffany falls over the edge, but Julia catches her and pulls her up (but not before it is revealed that Kirsty has disguised herself in Julia's skin). Both of them escape back to the hospital as the portal closes and they both leave the hospital.
Some time later, two movers attempt to pack up all of Channard's belongings before one notices the bloodied mattress. It kills him as the second mover enters the room. A pillar rises up and spins around, showing the near-dead Cenobite Pinhead screaming (Geoffrey Portass) as well as "Skinless" Julia, before stopping. The last head (Little John) is revealed to be the same man from the first film, who ends the movie by asking: "What is your pleasure, sir?" (the similar line the first film ends with).