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) enlists FBI Special Agent Chester Desmond (Chris Isaak) and Agent Sam Stanley (Kiefer Sutherland) to the case.
After arriving in the town of Deer Meadow, Desmond and Stanley deal with the hostile Sheriff Cable (Gary Bullock) and his Deputy Cliff Howard (Rick Aiello). Stanley performs the autopsy on Teresa and find that the killer left the letter 'T' on a piece of paper under her middle fingernail.
Desmond and Stanley afterwards continue their investigation by traveling to Haps Diner where Teresa worked the late shift and question the owner Irene (Sandra Kinder). In the morning, the agents travel to the Fat Trout Trailer Park where Teresa lived and let the cranky owner Carl Rodd (Harry Dean Stanton) access to her trailer. After Stanley leaves with Teresas body to Portland, Desmond returns to the trailer park where he discovers Teresa's missing ring under a trailer, but when he touches it he disappears.
At the FBI HQ branch in Philadelphia, FBI Special Agent Dale Cooper (Kyle MacLachlan) tells Cole about a strange dream he had the other night of the Black Lodge. After an encounter with a ghostly agent named Phillip Jeffries (David Bowie), who speaks about the Black Lodge and its minions to Cooper, Cole and Agent Albert Rosenfeld (Miguel Ferrer), Cooper learns that Desmond has vanished without a trace and travels to the Fat Trout Trailer Park to take over the case, but finds nothing.
One year later, in the town of Twin Peaks, 17-year-old Laura Palmer (Sheryl Lee) goes to high school, snorts cocaine in a restroom stall, and meets with her secret boyfriend, biker and poet James Hurley (James Marshall) while her hot-tempered other boyfriend Bobby Briggs (Dana Ashbrook) looks for her in vain. After school, Laura meets with her friend Donna Hayward (Moria Kelly) and confesses to her that her life is messed up and feels that shes falling through space into the fire of hell.
At home, when Laura discovers that Bob (Frank Silva), a gray-haired demon she sees in her dreams, has tampered with her secret diary, Laura takes it to Harold Smith (Lenny Von Dohlen) for safekeeping. The next day, Laura is on the Meals-on-Wheels program for the RR Diner when she leaves after an encounter with the ghostly Mrs. Tremond (Frances Bay) and her grandson for her house. Laura sees Bob at the foot of her bed looking for her diary. She screams and runs away, hiding in the bushes out front of her house. Moments later her own father Leland (Ray Wise) leaves the house and drives off. At this point Laura suspects who Bob really is. That evening, Laura comes home and Leland yells at her for not washing her hands before dinner and grows suspicious of the half-heart necklace which James gave her.
The next evening, Laura goes out and reluctantly lets Donna accompany her to the Roadhouse where they meet the sleazy bartender Jacques Renault (Walter Olkewicz) and their school friend Ronette Pulaski (Phoebe Augustine), where they go into another room and participate in orgies with strangers who pay Jacques for it. Donna, defiant and wanting to prove that she can be bad like Laura, is unaware that her beer has been spiked. She is nearly raped by a patron, but Laura drags her out of the place.
The next morning, on a drive, Leland and Laura get stuck in a small traffic jam at the stoplight where they are threatened by Mike (Al Strobel) a one-armed man from his truck in the next lane. Sitting in the car, Laura confronts Leland about his whereabouts when she spotted Bob in her bedroom that day and her suspicious become confirmed. In a flashback, Leland in fact was Teresa Banks killer and lover who killed her last year in a jealous rage when he learned that she employed Laura for her prostitute outings.
The next day at the school, Laura tells Bobby that shes out of cocaine, and he tells her that he will be buying some more from a dealer friend of Jacques tonight. That evening in the woods near the Packard Sawmill, Deer Meadow Deputy Howard arrives with a kilogram of cocain for Bobby and Laura, but Howard pulls out a gun prompting Bobby to shoot him with another gun. Bobby takes a stoned Laura and the cocain and runs off.
The next morning, James arrives at Laura's house and asks where she was last night, but Leland sees them prompting James to ride off. That evening, Laura's mother Sarah (Grace Zabriskie) is drugged by Leland. A little later, Bob crawls through Lauras bedroom window and begins to rape her. When Laura looks at Bobs face his features transform into that of her own father.
The next day is a blur as Laura goes to school, meets with Bobby, and goes home for the night. Laura sneaks out of her house and meets James in the woods who she tells that they cannot see each other anymore, then runs off. Laura meets Jacques, Ronette and Jacques drug dealing partner Leo Johnson (Eric DaRe) where they go to Jacques' mountain cabin for an orgy. Leland follows them there where he attacks and beats up Jacques while Leo escapes. Leland drags Laura and Ronette to an abandoned railroad car, ties them up and tortures them. An angel appears hovering above Ronette who has apparently repented her sins to God. The one-armed man arrives and helps Ronette escape, but its too late for Laura who's stabbed to death, her body wrapped in plastic and thrown into the lake where it surfaces the next morning where it's discovered.
In the Black Lodge months later, Laura meets the good self of Cooper as well as an angel who appears before her. Laura laughs and cries at the same time realizing that she now has been forgiven of her own sins and has two good spirits by her side for all eternity.