As the New Mutants fight demons in Limbo, Manhattan begins to transform into a demonic city, animating cars, elevators, mailboxes and fire hydrants in malicious ways. The Empire State Building, the focus of the dark magic enveloping Manhattan, begins to grow taller. Meanwhile, Madelyne Pryor (now the Goblin Queen), imbued with the powers of her template Jean Grey (as well as magical abilities learned from N'astirh), visits Jean's grave and gives physical form to her memories, then destroys the tombstone and tranforms Jean's parents into demons. N'astirh arrives and takes Madelyne to find her son at Sinister's lab/orphanage in Nebraska. The Goblin Queen is captured by Sinister, who explains her genesis, while N'astirh leaves, although not from cowardice. Cyclops and Jean Grey arrive, having come to the orphanage earlier in the day to search for Nathan, find comatose mutant children in the basement. Nanny II and Orphan-Maker engage Scott and Jean, while her armor-clad "children" steal the babies. N'astrih reappears in the basement, and he and his demons recapture the mutant babies from Nanny. Scott and Jean and chase after the demons. Meanwhile, Madelyne breaks free of Sinister's traps and N'astirh appears with Nathan. Madelyne plans to sacrifice him on the Empire State Building to permanently transform the city, and then, the world.

Back in New York, Beast and Iceman save Trish Tilby from a train-worm, while Warren mourns for Candy Southern.

In Limbo, Magik loses her Soulsword to S'ym, and while she can't teleport home, she 'ports the team and herself to Belasco's throne room, where she explains to the team how she came to Limbo, and how an alternate version of the X-Men died there, many at her hand. Fleeing the demons again, Magik takes a stepping disk into Limbo's past, where the team witnesses N'astirh stop S'ym from killing her. Again they are found by demons, and another stepping disk takes them to N'astirh's sanctum in that same past. N'astrih tells Illyana that he loves her, and that if she will reclaim her dark magic and use it to defeat S'ym, he will send her home. Weighing her friends' lives against her own, Magik agrees, and transforms into the Darkchilde, submerging her humanity behind its demonic facade. As her stepping disk to Earth opens, she pushes through a barrier and suddenly, a dimensional portal opens, initiating a rain of demons upon Manhattan. N'astirh tricked Magik into opening the portal, but she can't close it because the demon is keeping it open, and more and more of New York is transformed.

Scott and Jean, having tracked the demons and Nathan back to New York, arrive just in time to see the "demon reign" begin, and join their teammates and Warren, who has decided to join the team. At the same time, the X-Terminators and the New Mutants rescue the ten mutant babies that were trapped in N'astirh's mystical pentagram, and bring them to a church for safety. In another part of the city, Magik is tormented by demonically animated shops, tools, and appliances, while S'ym and N'astirh battle for Limbo. N'astirh becomes techno-organic, and Magik finally accepts her full power, and is coated in silver armor as she attacks N'astirh. N'astrih escapes and interferes with Madelyne's attack on X-Factor, but realizes that his pawn may have become a queen, whom he has little chance of cotnrolling. Meanwhile, the X-Men have arrived in New York to take out the Marauders, who have just relocated to the Alley, and chase them out into the transmogrified city and kill them. The X-Men are subtly changed by the Goblin Queen's magic, and are becoming darker in outward form as well as personality. The team, who count Maddie among their number, arrive at her side just as she "reverts" (after having nearly killed X-Factor). The X-Men confront X-Factor, whom they still believe are mutant hunters, and who are trying to get Nathan back. However, the light of truth breaks through the prevailing darkness and old friends reunite as the two teams reconcile and team up. Meanwhile Madelyne rides off on a demonic chariot. Havok catches up with her, but the demon's influence turns him into her thrall, the Goblin Prince.

Halfway across the globe, off the coast of England, Phoenix II telepathically connects with her "little brother" Nathan and, feeling his pain and fear, bursts out of Excalibur's lighthouse and tears off for New York. Excalibur follows her, but when they get to New York Rachel is nowhere to be found. Alone, Rachel is grabbed by the demons and transmogrified people composing the Empire State Building, but breaks free and falls to the ground. She is then attacked by living mannequins, one of whom steals her body and turns Rachel into a mannequin herself. Flying into the city, Meggan's empathy turns her to evil and she throws Nightcrawler to the demons. Kurt escapes their clutches, but falls a great distance to the ground and is knocked unconscious. Meggan's empathic power leads her to N'astirh, who rips her open to reveal the Goblin Princess. She then has Shadowcat and Captain Britain grabbed by movie films and drawn into a theater, and into the movies themselves. Brian chases Kitty through a variety of film genres. Meanwhile, Crotus, a servant of N'astrih's, sees Rachel and tries to magically marry her in order to take the Phoenix's power for his own.

N'astirh returns, and attacks the X-Men and X-Factor in Central Park. Meanwhile, Magik fights with S'ym, but the two are separated by the New Mutants. Magik then teleports them all to Limbo, where she decides to rule as the Darkchilde. However, the New Mutants, led by Wolfsbane, journey to Limbo's past and find Illyana's younger self, when she had just arrived from Earth. The Darkchilde is confronted with her younger, innocent self, whereupon she rejects her dark side and becomes a child of Light. She flings her Soulsword into the gateway and shuts it down forever. At the same time, she merges with her younger self, effectively negating the time she spent in Limbo and all of its effects. When her brother Colossus arrives and sees her armored but collapsed form, he rips open the armor and finds that Illyana has returned to her true age of seven years old.

Back in the theater, Kitty is being hounded by Brian, who is strangely weakened for no apparent reason. The Goblin Princess comes to help destroy Kitty, but suddenly, the Soulsword and armor manifest on her, and she uses it to break Brian out of his spell, and then clears Meggan of N'astirh's influence as well. Nightcrawler wakes up, meets a talking gargoyle, find's the mannequin that stole Rachel's body, and frees Rachel from Crotus' magic.

After defeating N'astirh, Longshot, who was bitten earlier by N'astirh, Dazzler, and Havok are on their way to joining the Goblin Queen. The X-Men and X-Factor confront the Goblin Queen, who is stopped from sacrificing her son. The Goblin Queen convinces Dazzler and Longshot to fight their temammates, and the X-Men still believe that X-Factor are mutant hunters, until Cyclops shows Storm that Medlyne, who had been monitoring all of the X-Men's communications, had kept all knowledge of X-Factor's true intentions from them. Madelyne encases herslef and Jean in a telekinetic force bubble which none of the mutants can crack. Cyclops tries to get Havok to fight Madelyne, and finally succeeds, although Havok still hates Scott for what he did to Madelyne. Psylocke manages to get Longshot to trust his luck again, and show the teams where to strike the bubble. Madelyne reveals her origin to Jean, and expresses her anger at being only a second-rate copy. As the teams breach to force field, Madelyne tries to kill them by blowing herself up inside a force bubble, but the heroes protect each other and Madelyne dies in Jean's arms, expending all of her energy in one burst. A piece of the Phoenix Force appears and once Jean finally accepts the Phoenix as part of her, imbues Jean with Madelyne's memories, as well as those of the Phoenix-clone. The city returns to normal.

When Jean, kneeling over Madelyne's body, cries out in pain, Psylocke takes some of the X-Men inside her head. There they learn Madelyne's true nature, as they see that Jean now has Maddie's memories. Sinister appears and starts destroying the memories, and Psylocke manages to hold him back for a little, but ultimately is defeated. Sinister tries to convince the Madelyne persona to submit to oblivion, but she denies him and casts him out of Jean's mind, apparently calling on the Phoenix to do so. Tracking Sinister through Madelyne's memories, the X-Men and X-Factor return to the Mansion, and capture Malice, threatening her with separation from Polaris, which could kill her, when a bomb goes off. In the wreckage of their former home, the X-Men and X-Factor face not only Malice and Sabretooth, but their leader, Sinister. Although the teams are all but defeated, Longshot, alone against Sinister and Malice, and lacking confidence in his abilities, manages to free Jean Grey, and the two teams stage a comeback. Cyclops, whose power is shut down by Sinister, remembers his childhood and realizes the truth about the orphanage where he grew up, and Sinister's part in it. Taunted and powered up by his brother Havok, Cyclops breaks Sinister's mental block and blasts the villain to smithereens.