The narrator explains how he instigated a secret investigation of the ruined town of Innsmouth, Massachusetts, by the U.S. government. He proceeds to describe in detail the events surrounding his initial interest in the town, which lies along the route of his tour across New England, taken when he was twenty-one. While he waits for the bus that will take him to Innsmouth, he busies himself in the neighboring Newburyport by gathering information on the town from the locals; all of it having superstitious overtones. The narrator finds Innsmouth to be a mostly deserted fishing town, full of dilapidated buildings and people who walk with a distinctive shambling gait and have "queer narrow heads with flat noses and bulgy, stary eyes". The only person in town who appears normal is a grocery store clerk from neighboring Arkham. The narrator gathers much information from the clerk, including a map of the town and the name of Zadok Allen, an elderly local who might give him information when plied with drink. The narrator hears repeatedly that outsiders are never welcomed in Innsmouth, and that strangers, particularly government investigators, have disappeared when they pry too deeply into the town.
The narrator meets Zadok, who explains that an Innsmouth merchant named Obed Marsh discovered a race of fish-like humanoids known as the Deep Ones. When hard times fell on the town, Obed established a cult called the Esoteric Order of Dagon, which offered human sacrifices to the Deep Ones in exchange for wealth in the form of large fish hauls and unique jewelry. When Obed and his followers were arrested, the Deep Ones attacked the town and killed more than half of its population, leaving the survivors with no other choice than to continue Obed's practices. Male and female inhabitants were forced to breed with the Deep Ones, producing hybrid offspring which have the appearance of normal humans in early life but, in adulthood, slowly transform into Deep Ones themselves and leave the surface to live in ancient undersea cities for eternity. He further explains that these ocean-dwellers have designs on the surface world and have been planning the use of Shoggoth to conquer or transform it. Zadok sees strange waves approaching the dock and tells the narrator that they have been seen, urging him to leave town immediately. The narrator is unnerved, but ultimately dismisses the story. Once he leaves, Zadok disappears and is never seen again.
After being told that the bus is experiencing engine trouble, the narrator has no choice but to spend the night in a musty hotel, the Gilman House. While attempting to sleep, he hears noises at his door as if someone is trying to enter. Wasting no time, he escapes out a window and through the streets while a town-wide hunt for him occurs, forcing him at times to imitate the peculiar walk of the Innsmouth locals as he walks past search parties in the darkness. Eventually, he makes his way towards railroad tracks and hears a procession of Deep Ones passing in the road before him. Against his judgment, he opens his eyes to see the creatures and faints at his hiding spot. He wakes up unharmed. Over the years that pass, he researches his family tree and discovers that he is a descendant of Obed Marsh, and realizes that he is changing into one of the Deep Ones. As the story ends, the narrator is accepting his fate and feels he will be happy living with the Deep Ones. He plans to break out his cousin from an asylum, who is even further transformed than he, and take him to the Deep Ones' city beneath the sea.