When CBS Radio asked 23-year-old Orson Welles to substitute for a summer for Lux Radio Theatre, Welles, never a stranger to audacity and recklessness, demanded that they hire on his entire theatre troupe, The Mercury Theatre. This was an expensive demand. But CBS Radio took the gamble, and let Welles do whatever he wanted -- and it was the smart thing to do. Originally titled First Person Singular (it was to be introduced by Welles, who would also play the lead), it came to be known as The Mercury Theatre on the Air. One of the distinctive characteristics of it was that, unlike most theatre-style radio programs, The Mercury Theatre on the Air didn't do radio versions of dramatic adaptations. Rather, Welles decided that it was important to adapt directly from the literary work to radio, because, whatever its limitations, radio is actually better for story-telling than theatrical productions are. Combined with the talent of the Mercury Theatre and the creativity (and extremely demanding standards) of Welles himself, the result was what is undeniably the single best series of literary adaptations in the history of radio, and many of the episodes of the series stand out as providing the best radio versions of major novels. Since they are direct adaptations, they are often surprisingly faithful, even when they are taking liberties; but since they use the full resources of radio, they often bring things out that were there in a fresh way. Their adaptation of G. K. Chesterton's The Man Who Was Thursday (one of Welles's favorite books), for instance, manages to stay close to the book while simultaneously bringing out much more of the nightmare-feeling that Chesterton was going for than you probably could do in your head alone. (Even setting aside the fact that Orson Welles is the perfect Syme.) You can things from the book that the radio adaptation cannot give -- but the radio adaptation can draw things from the book that you're probably not getting if you're not already looking for them.
The series originally had low ratings, although critical praise was very high. This changed with the most famous radio broadcast in the entire history of radio, which aired on October 30, 1938.
The radio play for War of the Worlds was co-written by Howard Koch (rather remarkably, it's only his second most famous script, since he was a co-writer on Casablanca later) and his secretary Anne Froelick (who went on to become a well-established screenwriter until she, like Koch, was blacklisted); Welles and the rest of the troupe certainly contributed. Certain liberties were taken with the story, moving it from England to Grover's Mill, New Jersey, and, most brilliantly of all, it was to be played as if it were a breaking news story. This was likely Welles's own idea, and may have been influenced by radio's second most famous 'radio hoax', Ronald Knox's satirical Broadcasting from the Barricades, which had British citizens, snowed in and unable to get to any other news sources, panicking that London was in the grip of a revolution that had lynched the Government and destroyed the Houses of Parliament. Certainly the style of the two is very similar, although it's difficult to say how much of this is due simply to the fact that they both draw on shared radio conventions.
Exactly what happened when the broadcast aired is difficult to determine -- many later accounts are certainly exaggerated. We don't have much of a clear conception of how the actual listening audience responded. We do know that people started calling each other to try to figure out what was going on. The episode at several points makes its fictional character clear, but if you missed those, you might go for twenty to thirty minutes with what sounded like very realistic breaking-news segments in the midst of a pretty ordinary radio music hour. The radio station started getting calls, and when they tried to tell people that nothing was going on, they were accused of covering things up. A later survey also indicated that some people thought that the Germans were invading. It was 1938, remember. Tensions are high. The world is on edge. And people settled in for a comfortable evening turn from the very popular Chase & Sanborn Hour, which regularly ran over, and thus, missing the introduction, hear nothing but what seems to be news about mysterious invading forces.
It is possible that this was precisely what Welles was going for. It is certainly what he was accused of trying for over the next several months in thousands of editorials and opinion columns as he was attacked for his lying and deceiving; CBS Radio held on in the face of criticism and lawsuits for mental anguish. All the lawsuits were dismissed, although one case was settled out of court when Orson Welles himself insisted that CBS buy a man a pair of shoes -- he claimed he had spent his shoe money trying to get away. Ironically, when H. G. Wells met with Orson Welles a couple of years later to discuss the matter, H. G. Wells was simply baffled about the whole thing, and went so far as to suggest that everybody had just been pretending for Halloween. Also ironically, while lots of copies of the script were made, very few of them survived, because most of them were seized by the police as evidence when there were early questions of whether CBS had acted criminally in misleading people by their false news stories; they were subsequently lost. Only two copies, Koch's and Welles's, are known to have survived.
Of course, in entertainment, any publicity is good publicity, as long as it makes people curious. The uproar guaranteed the series a sponsor -- Campbell's Soup -- and instead of ending when it was originally expected, it continued on in new format.
You can listen to War of the Worlds (and many other excellent literary adaptations) here.