A body wrapped in plastic floats down a river in Washington State. It is 17-year-old Teresa Banks (Pamela Gidley).
FBI Regional Bureau Chief Gordon Cole (David Lynch
) calls Agent Chester Desmond (Chris Isaak
) about the mysterious murder of Teresa Banks in the town of Deer Meadow.
At a small airport, Cole introduces Chester to his new partner, Sam Stanley (Kiefer Sutherland
), and they receive clues from Lil the dancer. During the drive to Deer Meadow, Chet explains to Sam most of the clues Lil provided, but he does not explain the blue rose pinned to Lil's red dress. After difficulty with the local sheriff's department, namely Sheriff Cable and his Deputy Howard, Desmond and Stanley eventually view Teresa's body at a morgue. They verify that her skull was crushed, note a spot on her finger where she must have worn a ring that is not logged among the items found on her person at the time of death and discover a tiny square of paper stuck under her fingernail, upon which is typed the letter "T."
Late that night after completing the autopsy, Desmond and Stanley travel to Hap's Diner where Teresa worked the late shift and question the middle-aged chain-smoking owner Irene (Sandra Kinder) about Teresa. Irene tells the two agents that Teresa only worked at the diner for a month but may have had a drug problem. Irene refers to Teresa's murder as a "freak accident." Irene also tells Desmond and Stanley that Teresa's left arm went completly numb three days before her death.
In the morning, the agents travel to the Fat Trout Trailer Park where Teresa lived. The cranky owner Carl Rodd (Harry Dean Stanton
) gives them access to her trailer. Carl serves them coffee, but he is not very helpfull in telling them much about Teresa. They notice a photo of Teresa wearing a large gold ring with a green stone on the forefinger of her left hand. This was likely the ring she was wearing when she died that is now missing.
Stanley leaves Deer Meadow after finishing his part in the investigation, while Desmond remains behind. Desmond returns to the trailer park to ask Carl about Deputy Howard's trailer. While wandering around alone, Desmond discovers Teresa's missing ring under a trailer, but when he touches it he disappears.
The following day at FBI headquarters in Philadelphia, Agent Dale Cooper (Kyle MacLachlan
) tells Gordon about a strange dream he had the night before. Long-lost Agent Phillip Jeffries (David Bowie
) suddenly re-appears. He questions Dale Cooper's identity before telling Cole about a meeting he witnessed in a dream. As he explains, we see images of the Man from Another Place (Michael J. Anderson), BOB (Frank Silva), Mrs. Chalfont (Frances Bay
), and her grandson. Jeffries begins to scream and disappears as we see shots of electrical lines. Desmond is reported missing and Agent Dale Cooper is sent to Deer Meadow to investigate his disappearance. After Cooper talks with Carl Rodd at the trailer park about a lot on the property, now vacant, where two successive families named Chalfont both kept trailers, he sees the words "Let's Rock" written in lipstick on the windshield of Desmond's abandoned car. The clues to Teresa Banks' murder lead to a dead end.
One year later in Twin Peaks, 17-year-old high school homecoming queen Laura Palmer (Sheryl Lee
) and her best friend Donna Hayward (Moira Kelly
) return to school. Laura snorts cocaine and secretly meets with James Hurley (James Marshall). After school, Laura talks with Donna about the difference between Hurley and Laura's actual boyfriend, the dopey Bobby Briggs (Dana Ashbrook
Later that day, Laura realizes pages are missing from her secret diary and tells her friend, an agoraphobe she met through her volunteer work with Meals on Wheels named Harold Smith (Lenny von Dohlen
), about it. She claims BOB took the pages. Harold tells Laura that BOB is not real. Laura argues that BOB is real and says that he told her if she does not let him be her, he will kill her. When Harold argues, Laura appears to become possessed-- her face changes color and she growls, "Fire walk with me!" Returning to normal and visibly shaken, Laura gives Harold her diary to keep. She leaves, stating she does not know when, or if, she will return.
In Philadelphia, Cooper tells fellow agent Albert Rosenfeld (Miguel Ferrer
) that he believes the killer will strike again and describes the appearance of the person he believes the victim will be. It is clear that Cooper practices unorthodox, most likely paranormal, methods of acquiring this information. Back in Twin Peaks on her Meals on Wheels rounds, Laura sees Mrs. Chalfont and her grandson in the diner parking lot. Chalfont gives Laura a painting of an empty room with a door, and her grandson informs Laura that the "man behind the mask" is in Laura's room. Laura runs home and peeks into her bedroom. She sees BOB, who leers at her as he looks up from behind her dresser where she used to keep her diary. Laura rushes outside in terror and hides near a hedge. Moments later, her father, Leland (Ray Wise
), emerges from the house. Laura realizes that her father could be BOB.
Later that evening, at the Palmer family dinner table, Leland, upon seeing the half-heart necklace James gave her, menaces Laura and questions her about her "lovers." Looking at her finger, Leland insinuates there is dirt underneath the nail. Sarah Palmer (Grace Zabriskie
) pleads with her husband to leave Laura alone and Laura appears speechless with horror. Later, Leland sits on the edge of his bed rocking back and forth until he suddenly begins to weep (his original personality having re-emerged). He goes into his daughter's bedroom and tells her he loves her. After he is gone, Laura looks at a picture of an angel on her wall and asks if Leland is really BOB.
Remembering the picture she received from Mrs. Chalfont that she left near the hedge, Laura goes outside to get it. After hanging it on her wall, she falls asleep. She dreams about entering the Black Lodge and about a ring. Suddenly, Cooper enters the room and we see the Man from Another Place. He tells Cooper that the Man from Another Place is "the arm", and he utters an Indian whooping sound. The Man from Another Place offers the ring to Laura, but Cooper warns her not to take it. Laura finds Annie Blackburn (Heather Graham
) next to her in bed, covered in blood. Annie tells Laura to write in her diary that "the good Dale" (Cooper) is trapped in the Black Lodge and can't leave. Laura sees the ring in her hand and is frightened. Hearing the muffled cry of her mother, Laura goes to her bedroom door. She is suddenly in the painting. When she turns she sees herself sleeping peacefully in her bed.
Laura awakens in the morning, and the ring is gone from her hand. Disturbed, she removes the painting from her wall.
Meanwhile, Bobby, Leo Johnson (Eric DaRe), and Jacques Renault (Walter Olkewicz) discuss drug scores. Bobby first phones Leo asking to score more drugs, but Leo hangs up on him. Bobby then calls Jacques at the Roadhouse, who agrees to send someone to meet with him in "two days midnight at the sound of sawing wood."
That evening, Laura is alone at home, dressed for a night out. Donna drops by, announcing that she wishes to accompany her, but Laura, annoyed, says she is not invited. Laura heads off alone to the Bang Bang Bar. As she is about to enter the bar, she encounters the Log Lady (Catherine E. Coulson
), who compares the evil influences in Laura's life to a forest fire. Inside the bar, Jacques introduces Laura to two men. The group is about to leave for the Pink Room to have sex, but Donna shows up and the men in the group, impressed by her "audition" kiss, figure she's ready to party and invite her along.
In the Pink Room, Laura discusses Teresa Banks' murder with Ronette Pulaski (Phoebe Augustine) while they both receive oral sex under the table. Ronette says that Teresa was blackmailing someone and planned to become rich that way. Laura sees one of Jacques' friends kissing Donna, who is sprawled on a table with her breasts exposed-- something snaps in Laura. She leaps to her feet in outrage, screaming at Donna not to wear her stuff, then yanks her jacket off of her drunken, oblivious friend, calling an end to the evening. The next morning, Donna awakens at home with no memory of the latter portion of the night due to the rufies their dates slipped into her beer. Laura tells Donna that she does not want Donna to become like her.
Leland arrives to collect Laura and the sight of Laura and Donna talking triggers a memory of Ronette and Laura laughing on a bed together during their days turning tricks. Leland takes Laura to breakfast. On the way there, MIKE (Al Strobel), the one-armed man, shouts madly at Leland from his pick up truck during a traffic jam at the stoplight in town. Mike accuses Leland of stealing corn. He tells Laura: "The look on her face when it was opened. . . There was a stillness like the formica table top." He shouts at Leland: "the thread will be torn!" Showing Laura the ring, Mike attempts to tell her that her father is BOB, but both Leland and Laura scream, preventing her from hearing.
Leland pulls into a gas station parking lot to gather his wits and recalls his affair with Teresa (in a long flashback sequence). After having set up a foursome with Teresa's friends, Leland fled in fear when he discovered Laura was one of them. This led to Teresa's discovering who her "John" really was. Leland is the man she was blackmailing.
Back in the present, sensing a change in her father's behavior, Laura questions him about seeing him on the day she found BOB looking for the diary. Later that night, Laura realizes the ring she saw on the hand of the one-armed man was the same one from her dream. At the same time, Leland remembers killing Teresa.
The next night, Laura and Bobby take cocaine in the woods, and Jacques sends a drug messenger (the Sherriff's deputy Howard) from Deer Meadow, carrying an enormous amount of cocaine. Howard takes out a gun intending to kill him, but Bobby's quicker on the draw-- he shoots the Deputy dead and futilely tries to bury him as Laura laughs, high as a kite. She keeps telling Bobby "You killed Mike!" until this appears to make some kind of sense to Bobby for reasons never fully explained.
The following morning, James arrives at Laura's house on his motorcycle and expresses worry about Laura taking drugs. But she tells him off, and he rides away while Leland watches them from the living room window.
That evening, Leland gives his wife valium to sedate her. She falls into a stuporous sleep (after seeing a white horse in her bedroom). Leland walks into the hallway to turn on the fan. BOB comes through Laura's window and begins to rape her. She realizes BOB has taken over her father.
The next morning, distraught, Laura quietly warns Leland to stay away from her. Leland finally realizes that Laura knows. Upset over the realization her father is actually his alter ego BOB, Laura cannot concentrate at school. Laura later refuses sex with Bobby, and he finally realizes that Laura was using him to get cocaine, causing him to hand over his own stash, seemingly cutting their ties. Laura arrives home and goes to her bedroom where she sees that the angel in the painting on her wall has disappeared. High on coke, Laura is preparing to meet Leo and Jacques when she receives a phone call from James, who demands to meet with her.
At 9:30 pm, James picks up Laura outside her house and rides away with her while Leland watches nearby. In the woods, Laura tells James "his Laura" is gone. Laura also blurts out that Bobby "killed a guy" two nights ago.
James and Laura continue to ride around on his motorcycle, but Laura jumps off the bike while it is stopped at the red traffic light at the corner of Sparkwood and 21st Street. Screaming that she loves him, Laura runs away from James, and travels deeper into the woods. Laura meets Ronette, Jacques, and Leo, and they all drive in Leo's red Corvette to Jacques' cabin where they engage in an orgy as Leland watches from outside. Jacques wants to have hard sex and ties Laura up. Leland attacks Jacques outside, sneaking up behind him and knocking him out with a liquor bottle. Leo sees Jacques laying on the ground outside and flees in panic. Leland takes Laura and Ronette, both bound, to the train car.
Meanwhile, the one-rmed man, Mike, realizes that BOB / Leland is about to kill again and chases after him. As Leland is tying Laura up a second time, she asks Leland if he is going to kill her. He does not answer. Leland places a mirror in front of her. She screams after seeing her reflection turn into BOB. BOB is real. He tells Laura that he wants her.
Ronette prays. She breaks down, stating that she is not ready to die because she is "dirty". Suddenly an angel appears in the train car as all actions stop. The angel causes both Ronette and Laura's hands to become unbound. Hearing Mike outside begging to be let in, Ronette, now free, is able to help him open the door. When Leland sees Ronette trying to let him in, he knocks her unconscious and kicks her out of the train car. Mike is able to use this moment to throw in his ring. Laura, whose hands are also free now, dons the ring, preventing BOB from becoming her. Angered that he can't be her, BOB kills her as he promised by stabbing her repeatedly. Laura dies. Mike slips away. Leland, ignoring Ronette's unconcious body, drags Laura's body away from the train car.
BOB/Leland places Laura's body in the lake. As her corpse drifts away, BOB / Leland enters the Black Lodge in the circle of small trees, where he encounters Mike and the Man from Another Place (who is seated at Mike's left side as the aforementioned "arm"). They tell BOB they want all their garmonbozia ("pain and sorrow"). BOB heals Leland's wound.
Laura's body washes up on the lakeshore, where it is found by the Sheriff's department the following morning (in the very first scene of the TV series).
In the final scene, Laura's well-dressed spirit later sits in the Black Lodge and notices Agent Cooper at her side; he has a hand on her shoulder. Laura looks deeply saddened until her own angel appears, and she begins to cry and then laugh. The film ends with Laura's face in white.