One day, Fred Madison, a Los Angeles saxophonist, receives a message on the intercom of his house: “Dick Laurent is dead.” The next morning, his wife Renee finds a VHS tape on their porch containing a video of their house. After having sex, Fred sees Renee’s face as that of a pale old man, then tells her he had a dream about someone resembling her being attacked. As the days pass, more tapes arrive, showing shots of them asleep in their bed. Fred and Renee call the police but the detectives offer no assistance. Fred and Renee attend a party being thrown by her friend Andy. The Mystery 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 answers the house phone when Fred calls him. Fred learns from Andy that the man is a friend of Dick Laurent’s. Terrified, Fred leaves the party with Renee. The next morning, another tape arrives and Fred watches it alone. To his horror, it shows him hovering over Renee’s dismembered body. He is sentenced to death for her murder.
While on death row, Fred is plagued by headaches and visions of The Mystery Man and a burning cabin in the desert. During a cell check, the prison guard finds that the man in Fred’s cell is now Pete Dayton, a young auto mechanic. Although Pete is released into the care of his parents, he is followed by two detectives who are trying to find out more about him. The next day, Pete returns to work at the garage where gangster Mr. Eddy asks him to fix his car. Mr. Eddy takes Pete for a drive, during which Pete witnesses Mr. Eddy beat down a tailgater. The next day, Mr. Eddy returns to the garage with his mistress, Alice Wakefield, and his Cadillac for Pete to repair. Later, Alice returns to the garage alone and invites Pete out for dinner. When Pete and Alice begin an affair, she fears that Mr. Eddy suspects them, and concocts a scheme to rob her friend Andy and leave town. Alice also reveals to Pete that Mr. Eddy is actually an amateur porn producer named Dick Laurent. Pete gets a phone call from Mr. Eddy and The Mystery Man, which frightens Pete so much that he decides to go along with Alice’s plan. Pete ambushes Andy and accidentally kills him, before he notices a photograph showing Alice and Renee together. Later, when the police are at the house investigating Andy’s death, Alice is inexplicably missing from the photo.
Pete and Alice arrive at an empty cabin in the desert and start having sex outside on the sand, which ends with Alice getting up and disappearing into the cabin. Pete transforms back into Fred. Upon searching the cabin, he meets The Mystery Man, who begins filming and chasing Fred with a video camera. Fred escapes and drives to the Lost Highway Hotel, where he finds Mr. Eddy and Renee having sex. After Renee leaves, Fred kidnaps Mr. Eddy and slits his throat. The Mystery Man shoots Mr. Eddy dead and then whispers something to Fred before he disappears. Fred drives to his old house, buzzes the intercom and says: “Dick Laurent is dead.” When the two detectives drive up to the house, Fred runs back to his car and drives off, with the detectives in pursuit. Fred suddenly begins convulsing and screaming as his car speeds down the darkened highway.