Karen White (Dee Wallace) is a popular television anchorwoman. As the film opens, she is part of a sting operation intended to lead to the capture of a serial killer. The murderer, who has been dubbed "Eddie the Mangler" by the press, has developed an obsession with Karen, sending her messages and making phone calls to her. Under police surveillance, Karen agrees to meet with Eddie, much to the concern of her husband, Bill (Christopher Stone). Wearing a hidden microphone, Karen makes her way to an appointed meeting place with Eddie, which turns out to be an adult bookstore. As instructed, she makes her way to the peepshow booths at the back and finds Eddie's booth. Meanwhile, Karen's wire transmitter has stopped functioning, and unbeknownst to her, she is cut off from the police. They frantically send out an all-points bulletin to track her down.
As Karen talks with Eddie, she sits with her back to him and he does not allow her to turn around and look at him. His sexual obsession with her becomes clear, and something about Eddie seems to change. He tells Karen to turn around and she sees something about him that terrifies her. As she breaks away from Eddie, police arrive and fire rounds into the video booth, killing Eddie. Outside, reunited with Bill and her colleagues, Karen can remember nothing about what happened inside the booth.
Although Karen makes an attempt to return to work after her encounter with Eddie, she finds she is unable to perform when it's time to go on the air, suffering an embarassing breakdown during the live broadcast. In an effort to recover from her trauma, Karen visits her psychiatrist, Dr. George Waggner (Patrick MacNee). Waggner is also a well known author, and has written a pop psychology book that likens modern man to wild animals. Waggner decides to send Karen to The Colony, a rural retreat were select patients go to relax and participate in group therapy. Karen and Bill reach the Colony and discover that it is scenic, but the inhabitants are more than a little bit strange. The isolated forest location makes them feel cut off from the rest of the world, and Karen is disturbed by the strange howling that she hears at night. Karen befriends a woman named Donna (Margie Impert), and the two of them investigate strange animal noises one night to find a deer that's been torn to pieces by some other animal.
Back in the city, Karen's colleagues Terry (Belinda Belaski) and Chris (Dennis Dugan), continue their investigation of "Eddie the Mangler". After finding out where Eddie used to be employed, they are able to locate his former apartment, covered in news clippings of his murders. They also find numerous sketches of people and places, one of them being a sketch of Karen. Terry plans on getting Dr. Waggner on board for a news piece she is developing, and Waggner seems surprised that Terry and Chris have uncovered Eddie's last name, which is Quist. Terry and Chris make the connection between Eddie and werewolves due to his drawings, which depict human beings transforming into animals. Investigating it as an angle to their story, they research the history of lycanthropy. A bookstore owner (Dick Miller) informs them about some elements of werewolf lore, including the fact that they cannot be killed by anything except fire or silver bullets. He even shows them a cache of real silver bullets that a customer ordered but never claimed. Following up on this information, Chris and Terry visit the morgue and ask to see Eddie's body, but it is mysteriously missing, and the door to the freezer compartment is severely damaged from the inside.
Karen's group therapy sessions are not going well, as she becomes terrified every time she tries to remember what happened in the video booth. Her relationship with Bill is suffering as well, particularly their sex life. One of the Colony residents, a seductive woman named Marsha (Elisabeth Brooks), seems to have designs on Bill. Karen's new friend Donna says Marsha is a nymphomaniac, but Dr. Waggner says Marsha is simply misunderstood. Marsha seems to disagree with the doctor about his theories; she cares for a brother named T.C. (Don McLeod) who seems to be somewhat deficient, and she reacts with hostility when she finds him reading one of Waggner's books. Bill, who is a vegetarian, is pressued by the Colony men into going on a rabbit hunt with them, and he returns with a fresh kill. T.C. tells him to take it to Marsha and she will prepare it; Marsha instead tries to put the moves on Bill, who is obviously attracted to her. Instead, Bill angrily rebuffs her out of respect for Karen, and leaves her cabin. As he walks back to his own cabin, he is attacked by a large wolf, which pins him down and bites him on the shoulder. Dr. Waggner administers a rabies shot and bandages the wound.
After Bill's attack, Karen is even more distressed, and she makes a frantic phone call to Terry and Chris asking them to come to the Colony. Chris sends Terry on her own ahead of him, planning on joining her there later. Karen is relieved to see Terry, telling her all about the strange things she has seen at The Colony. That night, Bill leaves the cabin after Karen falls asleep and meets Marsha in the woods, where they have sex by an open campfire. In the middle of their lovemaking, they both transform into werewolves.
The next day, Terry goes out on her own, taking photographs and exploring the resort, and she is startled to discover that a particular vista overlooking the ocean from a cliff is the exact image of one of Eddie's sketches. A voice that seems to call her name lures her to Marsha's cabin, which is now deserted, and while Terry is taking pictures, a raging beast attacks the cabin, unseen by Terry. It chases her from room to room, breaking through each door, until she leaps from a window, injuring her ankle. She climbs inside a basement room for shelter but the beast corners her there, reaching inside with limbs that seem both animal and human. Terry seizes a Swedish carpenter's axe and amputates its arm, and it flees, howling in pain. Terry watches in horror as the wolf-like arm morphs into a human arm.
Terry rushes to Waggner's office, finding it deserted. She phones Chris and tells him about how she was attacked, and how Eddie's drawings are of real places at the Colony. She is convinced that Waggner must be in on whatever is going on, and with Chris on the phone, she begins to go through Waggner's files. Terry finds a series of folders labeled Quist, one for Eddie, Marsha, and T.C., but before she can look at them, she is confronted by a huge wolflike creature that kills her while Chris listens helplessly on the phone. Panicked, Chris rushes to the bookstore and buys the silver bullets from the shop owner, then rushes to The Colony.
Karen has a fight with Bill about the fact that he left the cabin in the middle of the night, and she knows he went to meet Marsha, especially when she sees him without his shirt and realizes he has long scratches on his back. Bill slaps Karen across the face and she leaves the cabin in a fury, taking her bag and going over to Dr. Waggner's office. She finds nobody there, but an examination table is set up with somebody lying on it. She pulls back the curtain and discovers Terry's body, the throat torn out and bloody. Karen is horrified, and suddenly she is confronted with Eddie, in human form. He speaks menacingly to her, angry that she tricked him by arriving with police. "I'm going to give you a piece of my mind," he says, and pulls a bullet out of his forehead. In a long montage, we see Eddie transform from a man into a werewolf. Karen watches in shock, but she finds a bottle of acid and hurls it into Eddie's face, scarring him and allowing her to escape.
Chris arrives at Waggner's office shortly after the attack and is confronted by Eddie, who seizes Chris' rifle. Eddie is in human form again, but now hideously scarred from the acid attack. He replays Chris a cassette recording of Terry's murder, relishing her screams, and dares Chris to shoot him with the rifle. Of course Eddie does not realize it is loaded with silver bullets, and he dies when Chris shoots him.
Chris meets up with Karen and they try and escape, but they're stopped by the colonists, who take them back to the main "meeting barn". Inside is Terry's body, surrounded by all of the colonists, who are all werewolves. Karen is dismayed to realize that even Waggner is a werewolf, and that they plan to kill both herself and Chris.
Chris, however, still has the rifle, and he begins to shoot the werewolves. They soon realize that the gun is loaded with silver, and they begin to panic, transforming into wolf form and retreating from Chris back into the barn. Chris bolts them inside and together, Karen and Chris pour gasoline all around the barn and set it on fire. Inside they can hear werewolves screaming in agony as they are burned alive. As they try and escape, they are confronted by more werewolves who try and stop them, but they make it to their car. In one last attack, a wolf lunges through the back window of the car and bites Karen on the shoulder. They shoot it and it turns back into human form--it is Bill. "We have to warn people, Chris," she says. "Make them believe."
Some time after the ordeal, Karen is ready to return to her news anchor position. She speaks kindly to her colleagues and is introduced to give a news report about her experience at The Colony; the blaze killed many "people" there, and has made headlines. Karen begins by veering from the approved script that appears on the teleprompter; people think she is having another breakdown, but Chris insists that Karen be allowed to continue. Karen tells the live audience that there is a secret society among them of shapeshifters, and that she has experienced it firsthand. She calls for everybody to aware of the threat, and in a final act, she announces that she will offer proof of her story. Karen begins transforming into a werewolf on live television, and people in the viewing audience give mixed reactions. Some people think it is a movie, while others think it's simply a hoax. After Karen is fully transformed, she looks sadly at Chris, who shoots her with a silver bullet, killing her. One man, watching from a tavern, announces that it was real, that Karen really did turn into a werewolf and they shot her. Also sitting at the bar is Marsha, who has obviously escaped the blaze, along with other werewolves. The cycle will continue.