In 1680s England, King James II sentences his political enemy, Lord Clancharlie, to death in an iron maiden. Clancharlie's son, Gwynplaine, is disfigured with a permanent grin by comprachico Dr. Hardquannone, so that he will "laugh forever at his fool of a father". When the comprachicos are exiled, Gwynplaine is deserted in the snow. He discovers a blind baby girl, Dea, whose mother has died of hypothermia. Together, they are taken in by the mountebank Ursus.



Years later, a now-adult Gwynplaine has become the Laughing Man, the freak show star of a traveling carnival. He and Dea have also fallen in love; he remains distant, believing himself unworthy of her affection due to his disfigurement, although she cannot see it. Meanwhile, the jester Barkilphedro, who had been involved in Lord Clancharlie's execution, is now attached to the court of Queen Anne. He discovers records that reveal Gwynplaine's lineage and rightful inheritance. That estate is currently possessed by sexually aggressive vamp Duchess Josiana.



On an evening of Gwynplaine's show performance, Josiana attends, but does not laugh with the rest of the crowd, as she is attracted to Gwynplaine's disfigurement. After the show, she requests his presence to her room that night and attempts to seduce him, but he rejects her advances and flees. He returns to Dea and lets her touch his disfigured face. She accepts him by saying: "God closed my eyes so I could see the real Gwynplaine!", and the couple express their love for one another. Later the queen's guards arrest Gwynplaine and, to stop his friends from looking for him, they fake his death, leaving Dea, Ursus and his friends heartbroken. Then, the group are ordered to leave England by Barkilphedro.



Queen Anne grants Gwynplaine his peerage and a seat in the House of Lords, and orders Josiana to marry him, in order to restore the proper ownership of the estate. Ultimately, Gwynplaine renounces his title, and refuses the Queen's order of marriage. He escapes, pursued by guards in a chase punctuated by swordplay. He arrives at the docks and is happily reunited with Dea and Ursus on their ship. Together, they all sail away from England.

The film is thus given a more upbeat ending than that of Hugo's novel, in which both Dea and Gwynplaine die at the end.