I think the first time I ever became of the idea of "meta" humor was Tango & Cash, when someone claimed that Ray Tango (Stallone's character) "thinks he's Rambo," to which Stallone replied "Rambo is a pussy." As an adult, I just laugh, but as a kid (and okay, a bit now even still) I just wondered why Ray Tango never noticed that Rambo looks EXACTLY LIKE HIM. Or was Rambo played by someone else in this world? Oddly, that would be the explanation in Last Action Hero, when we see that Stallone plays the Terminator.
The point is, your brain can melt thinking about it if you actually give a shit, so it's probably best not to. Especially if you're a horror fan, because an alarming number of franchises can't even get through their entire run without referencing earlier entries as movies that exist in the world of that particular film. Some are fully intentional and even part of the point; others just seem like innocent mistakes. There might be more, but here are my favorites:
1. Halloween III
People give Roger Ebert a lot of shit nowadays for his writing lapses (like spoiling major plot elements without warning), and some will be quick to say it's because of his medical issues and we shouldn't pick on him. But it's actually nothing new for the guy - he was getting "confused" at least as far back as 1982, claiming that Halloween III began where II ended, with Michael Myers being blown up in the hospital parking lot (eh, he was close at least). In fact, that's what got me to watch the movie as a kid after hearing it was Myers-free: "At least he's in it for a few minutes," young BC rationalized. But no, the guy in the parking lot is a completely different character (did Ebert not notice he was lacking a mask and wearing a nice suit?), and even more damning - Halloween III exists in a world where the original Halloween is a horror movie that airs on television around this time of year! So even if he somehow thought Mr. Suit was Michael Myers, why didn't he think much of it when Tom Atkins sits there and watches Halloween later on in the film?
2. Silent Night Deadly Night 2
One of the weirdest examples, as unlike Halloween III this is a direct followup to its predecessor, with the younger brother of the killer in the first film talking to a shrink about all of the terrible things that happened in that one (many of which he wasn't there to see, but fine). It's all nice and normal - Eric Freeman's acting notwithstanding - until Ricky recalls the time he... went to see Silent Night, Deadly Night in the theater? Some have theorized that he was seeing a film BASED on the events of the first film (like "Stab" in Scream), but we see what he's watching and it's the actual movie (not a recreation), so that theory doesn't quite work unless they reanimated everyone's corpses to play themselves.
3. Gremlins 2: The New Batch
Joe Dante's sequel almost feels like a spoof of his first at times, and damned if it isn't one of the most entertaining horror movies of the '90s (to this day I can't decide if I like this more than the original. I think I do though). But while it's a direct followup for the most part, Dante couldn't help but have a little fun at his own expense; at one point, Leonard Maltin shows up (as himself) to explain why he hated the first Gremlins so much, before some of the creatures (one holding a copy of the movie) show up and strangle him to death. And note - this isn't even during the sequence where Hulk Hogan yells at the Gremlins for screwing up the movie we are watching. It's the sort of thing that probably kept the movie from matching the box office success of the original, but we as a people are better for it.
4. Wes Craven's New Nightmare
Wes Craven had little involvement with the Nightmare series after the original; he wrote a draft of Dream Warriors but was not involved in its production, to the best of my knowledge. After being wooed back by Bob Shaye for a potential seventh film, Craven found himself unable to even follow the story of the later films (trust me, it wouldn't have been worth the effort, Wes). Thus, he opted for a bold, wholly new take on the character - setting it in the world of Hollywood, where he and his cohorts (Robert Englund, Heather Langenkamp, etc) are attempting a new, presumably traditional Freddy film. Not counting a scene at the New Line offices it's not AS self-fellating as it could have been, and in fact the scene where Langenkamp finds her son watching the original film is creepier than any of the otherwise traditional Freddy sequences. It doesn't always work, but it's certainly an inventive "sequel" - rare for a series on its seventh installment.
5. Blair Witch 2: Book Of Shadows
We talked about this one recently, but it bears repeating: over a decade later, I'm still impressed at the risk they took with their first sequel, setting it in the "real world" where Blair Witch Project was a fictional movie that had a rabid fan base, and following those fans. Unlike the others (even New Nightmare), it wasn't even close to what people might have had in mind about a sequel - to some, it would be like calling Fanboys "Star Wars Episode VII" and hoping no one minded.
Scream finds itself embroiled in TWO cinematic impossibilities, though neither are its own fault. In the first example, we have H20, where Michelle Williams and Jodi Lyn O'Keefe's characters are watching Scream 2. It's quick, but if you think about it, it creates a cinematic Moebius strip - how can they exist in a world where the Scream movies exist when those movies exist in a world where Halloween movies exist? Laurie Strode could have walked into the room and seen Randy talking about her, which would probably cause more psychological damage than Michael Myers ever could have managed.
Similarly, in the terrible Scream 3, we learn that the Woodsboro universe shares one with Kevin Smith's "View Askewniverse," as Jay and Silent Bob walk by. Amusing... but a year later, Jay and Silent Bob would find themselves wandering around the set of Scream 4 (in Strike Back). Make up your mind, Silent Bob (please note - the made up Scream 4 we see in Strike Back is better than the one we actually got).
These and what I'm sure are other instances are just another example of how seriously we horror fans take our franchises. To this day people get mad that a movie called Halloween III doesn't have Michael Myers ("If they just called it Season of the Witch...", they'll say, missing the irony that Halloween III has a lot more to do with the Halloween holiday than the original anyway), and Joe Berlinger was vilified for daring to suggest that the first Blair Witch movie wasn't "real." And it's no surprise that all of the above were box office disappointments (not counting the bonus examples), which is why it's probably not the best idea to get too tricky with the fanbase. Then again, I find Halloween III and New Nightmare to be superior to many of the "traditional" entries in their respective franchises, so personally I encourage filmmakers to get a little weird. The fans will always find something to complain about anyway, so why not think outside the box? As Jack Donaghy would say: "There's no such thing as bad ideas, only great ideas that go horribly wrong!"