The basic plot is that several recent film school grads are hard at work making a slasher pic called, appropriately enough, "Slasher 3." There never was a "Slasher" or "Slasher 2" of course, because these are the characters in TATWD we're talking about. But in the "Slasher" world, parts one and two have already been made.
So "Slasher 3" is about a group of recent film school grads who are hard at work making a horror movie called "Slice 3." In the "Slasher" world, of course, there was no "Slice" or "Slice 2," because they were made in the world of "Slice 3."
"Slice 3" is about a group of film-school students who are still actually in film school. One of them, "Dwayne," is writing his thesis on self-referentiality in slasher movies. Another "Jessica," is exposing the universal conventions upon which slasher movies are based. Yet another, "Daphne," is exploring the psychosexual ramifications of the "nudity = imminent death" rule in slasher movies. Basically, they're all studying slasher movies, is the point.
But wait! Someone starts committing a series of grisly murders on the film-school campus! One by one, the minor characters die in the inevitable and inescapable teleology and rigorous logic of the slasher-movie ouvre.
But wait! This is all happening in the world of "Slice 3" remember. Meanwhile, in the world of "Slasher 3," as the filming of "Slice 3" progresses, things start getting weird on the set. Someone, dressed in the outfit of the maniac killer of the movie "Slice 3" starts killing the film-school grads who are making the film.
But wait! This is all happening in the world of "Slasher 3" remember. Meanwhile in the world of "TATWD," nothing really at all is happening on the set. But for a while, the kids making the movie (none of which are the same people that appeared in "Blair Witch" BTW) get increasingly spooked, and tense, and filming is not going particularly well.
Then someone dressed as the maniac killer in "Slice 3" (and thus also "Slasher 3") starts killing the kids making the movie. They all accuse each other of doing it, and know that someone simply couldn't take the tension anymore and felt that it was necessary to kill someone because the rules of slasher movies simply demanded it, at this point.
Meanwhile, filming of "Slasher 3" continues, in which the kids making "Slice 3" all accuse each other of doing it, because they couldn't take the pressure of making their first commercial movie, and because the rules of slasher movies simply demanded it.
Meanwhile, production of "Slice 3" continues, where the film-school students all accuse each other of doing the murders, because they're all trying to study the deeper implications of the rules of slasher movies, and someone clearly just can't handle the pressure of writing their film-school thesis.
Warning: Spoiler Ahead!
The movie is laid out in interleaving scenes from each of the three films, which generally follow the same course, and things happen in a similar order. This leads to some serious confusion, since all of the kids appearing in "TATWD" are making "Slasher 3," and (due to budget constraints) are also the stars of "Slasher 3," who are the crew making "Slice 3" and (due to budget constraints) are also the stars of "Slice 3," and therefore each actor in "TATWD" plays at least three roles, which are basically indistinguishable except for the names. And the names are no real help, since they're all pretty much bland generic American names.
But, as each story nears it's ultimate conclusion, and people "split up to search the house" and "see what that noise outside was" and whatnot, the cuts come quicker, until the three movies are cut together scene for scene. And in the end, just as each of the three killers is poised over each of the three ultimate targets (which are all the same two people, of course, of necessity), the film suddenly cuts to black, and stays black for almost a minute
Then the picture cuts in again, and we're in a small room in a basement apartment in Washington DC, looking over the shoulder of a young ex-film student who's writing the whole plot of all three movies as a parodic "review" of Scream 3 for his website.
The whole audience sighs with relief, and then, realizing they've been had, gets a little bitter and starts grumbling, because this ending is, after all, a total cop-out. But suddenly, just as they're about to get pissed off, the camera swings around 180 degrees and reveals the killer from all three fictional movies standing right behind the guy, knife raised high.
Cut to black. Roll credits.