Fred Madison (Bill Pullman), a Los Angeles saxophonist, receives a message on the intercom of his house from an unknown man, who says: "Dick Laurent is dead". During a break at a show one night, Fred calls his home but Renée (Patricia Arquette), his wife, does not answer any of the home's ringing telephones. Arriving home later, Fred finds her sleeping in their bed. The next morning, Renée finds a VHS tape on their porch which contains a videotape of their house. After having sex one night, Fred sees Renée's face as that of a pale old man, then tells Renée of a dream he had about someone resembling her being attacked. As the days pass, more tapes arrive showing the interior of their house and even shots of the pair asleep in bed. Fred and Renée call the police but the detectives they send over offer no assistance.
Fred and Renée then attend a party being thrown by Andy (Michael Massee), Renée's friend. At the party, the pale old man Fred dreamed about approaches Fred, claiming to have met him before. The man then says he is at Fred's house at that very moment and even somehow answers the house phone when Fred calls it. Fred asks Andy who the man is, and Andy replies: he is a friend of Dick Laurent's. Fred, terrified and confused, leaves the party and heads home with Renée. The next morning, another tape arrives and Fred watches it alone. To his horror, it shows him hovering over Renée's dismembered body. He is arrested for her murder, tried, found guilty and sentenced to death. Shortly after arriving at death row, Fred is plagued by frequent headaches and strange visions of the Mystery Man, a burning cabin in the desert and a strange man driving down a dark highway.
During a routine cell check, the prison guard is shocked to find that the man in Fred's cell is now Pete Dayton (Balthazar Getty), a young auto mechanic. Since Pete has committed no crime, he is released into the care of his parents, who take him home. Pete is then followed by two detectives who are trying to find out more about him. The next day, Pete returns to work at the garage where he is soon called on by gangster Mr. Eddy (Robert Loggia), to fix his car. Mr. Eddy takes Pete for a drive, on which Pete witnesses Mr. Eddy chase and beat down a tailgater. The next day, Mr. Eddy returns to the garage with his mistress, Alice Wakefield (also played by Arquette) and his Cadillac for Pete to repair. Later, Alice returns to the garage alone and invites Pete out for dinner. Soon, Pete and Alice begin a secret liaison, meeting each other at run-down motels every night. Alice soon begins to fear that Mr. Eddy is privy to their affair and concocts a scheme to rob her friend Andy and leave town. Alice then reveals to Pete that Mr. Eddy is actually an amateur porn producer named Dick Laurent.
At home, Pete gets a phone call from Mr. Eddy and the Mystery Man (which eerily mirrors Fred and the Mystery Man's earlier conversation), which distresses Pete so much that he decides to go along with Alice's plan to escape. Alice tells Pete what he must do to carry out her plan to rob Andy but Andy puts up unexpected resistance and ends up dead, accidentally impaling himself on the edge of his glass coffee table. Pete notices a photograph showing Alice and Renée together, with Alice claiming that the blonde woman in the photo is her. Later, when police are at the house investigating Andy's death, the same photo shows only Renée with Andy and Mr. Eddy; Alice is inexplicably missing from the shot.
Pete and Alice arrive at an empty cabin in the desert, the same one Fred had envisioned. The two start having sex but during the act Alice gets up, walks up the stairs to the cabin and disappears inside. Pete suddenly transforms back into Fred Madison. Upon searching the desert cabin, he meets the Mystery Man who begins filming and chasing Fred with a hand-held video camera, revealing himself to be the camerman from earlier. Fred escapes and drives to the Lost Highway Hotel, where he finds Mr. Eddy and Renée having sex. After Renée leaves, Fred kidnaps Mr. Eddy, beats him and slits his throat. The Mystery Man then shoots Mr. Eddy dead and whispers something to Fred. The Mystery Man disappears and Fred drives off in Mr. Eddy's car. Fred drives to his old house, buzzes the intercom and says: "Dick Laurent is dead". When the two detectives then drive up to the house, Fred runs back to his car and drives off with the detectives in pursuit. As it gets dark, Fred is shown speeding down the highway pursued by the police. Fred suddenly begins convulsing and screaming, before the familiar image of the highway at night is seen.

Question: What is the real identity of Mr. Eddy?
Answer: He is Dick Laurent, an amateur porn producer.