In a hotel room, a young prostitute, identified in the credits as the “Lost Girl”, cries following an unpleasant encounter with her client while watching a television show about a family of surrealistic anthropomorphic rabbits who speak in cryptic statements and questions. A gramophone plays Axxon N., “the longest-running radio play in history”. Meanwhile, in Los Angeles, actress Nikki Grace (Laura Dern) auditions for the lead role in the film On High in Blue Tomorrows. Nikki is visited by a Polish woman (Grace Zabriskie) who claims to be her neighbor. The woman tells Nikki two stories: one of a boy who, looking at his reflection in a mirror, created evil, and another about a girl who, wandering through an alleyway behind a marketplace, “discovers a palace”. The woman predicts that Nikki will get the role, and asks her if her character is married and if the plot involves murder. Nikki denies both, but her neighbor disagrees. The next day, Nikki celebrates having won the role as her husband Piotrek (Peter J. Lucas) watches her. Nikki meets the film’s lead actor Devon Berk (Justin Theroux) and the two begin a relationship, though Devon is warned by his entourage that Nikki is out of bounds due to her husband’s power and influence. Later, during a rehearsal, the crew is interrupted by a disturbance. Devon investigates, but finds nothing. Shaken by the event, director Kingsley Stewart (Jeremy Irons) confesses that they are shooting a remake of a German feature entitled 47. Production was abandoned after both leads were murdered, creating rumors of the film being cursed. One day, Nikki finds a door marked “Axxon N.” in an alley behind the set. Upon entering, she finds herself at the rehearsal weeks before, and she causes the noise that Devon investigated that day. Nikki escapes into the home of a character named “Smithy”. Devon looks through the windows, but sees only darkness.
In the house, Nikki finds Piotrek in bed and hides from him in a closet, where she encounters a troupe of prostitutes who advise her to burn a hole through silk with a cigarette and look through the hole. Nikki complies and sees one of the film’s characters, “Doris Side” (Julia Ormond), tell a policeman that she had been hypnotized by a man known as “The Phantom” to murder someone with a screwdriver, but finds the screwdriver embedded in her own side. A mysterious organization claims to have captives from Inland Empire. In 1930s Łódź, prostitutes are beaten by pimps while murder permeates the city. Nikki, having become one of the group of present-day prostitutes, wanders the streets while her companions ask, “Who is she?” Nikki asks several men if they had met her. Meanwhile, Nikki’s character “Sue” meets a policeman at a nightclub and tells him how she was abused in her childhood, which led to her prostitution, and how she is being pursued by a red-lipped man; Sue arms herself with a screwdriver in response. She also mentions her husband Smithy, a circus bear tamer with connections to both the pimps and the organization. Sue walks down Hollywood Boulevard and sees Nikki, but is attacked by Doris, who was hypnotized by the Phantom to kill her. Doris stabs Sue with her own screwdriver, and Sue falls at a bus stop, where two homeless women talk about a prostitute named Niko, a beautiful woman whose blond wig makes her look like a movie star, thus allowing her to walk through the rich district without drawing attention. One of the women holds a lighter in front of Sue’s face until she dies. Kingsley yells “Cut!” and the camera pans back to show this has merely been a film scene.
Kingsley informs Nikki that her scenes for the film are complete. In a daze, Nikki wanders off set and into a nearby cinema, where she sees not only On High in Blue Tomorrows, but events that are currently occurring. She wanders to the projection room, but finds an apartment building marked “Axxon N.”. There, Nikki confronts the red-lipped man, now known to be the Phantom, and shoots him. The Phantom transforms into a deformed version of Nikki, and then into a bloodied fetal figure before dying. Nikki flees into Room 47, which houses the rabbits on television, though she fails to see them. She then meets the Lost Girl, and they kiss. Nikki and the rabbits disappear in a white light, and the Lost Girl escapes from the hotel and into Smithy’s house, where she happily embraces her husband and son.
Nikki, back at home, smiles victoriously at the Polish woman and finds a one-legged woman (Tracy Ashton) that Sue had mentioned, Niko the prostitute, and a monkey. The end credits roll over a group of women dancing to Nina Simone’s “Sinner Man” while a lumberjack saws a log to the beat.