The small northwest town of Twin Peaks, Washington is shaken up when the body of the Homecoming Queen, Laura Palmer, is discovered washed up on a riverbank, wrapped in plastic.

Agent Cooper enjoys the comforts of the Great Northern Hotel; Bobby Briggs and Mike Nelson are released from jail; Doctor Hayward hands over the autopsy report on Laura Palmer; Cooper and Truman interview Josie Packard; Audrey Horne and Donna Hayward vow to solve Laura's murder; Sarah Palmer has a vision of a gray-haired man; Doctor Jacoby conceals important information.

Ben Horne's brother, Jerry, arrives in Twin Peaks. He and Donna decide to be together. Ben and Jerry travel to One Eyed Jacks and meet with it's madam, Blackie O'Reilly. Audrey leaves a clue for Cooper. Deputy Hawk finds a bloody towel near the crime scene. Cooper demonstrates a unique deductive technique. The cynical Special Agent Albert Rosenfield arrives to examine the body of Laura Palmer. Josie discovers Catherine has been keeping two ledgers. Leo takes his anger out on Shelly. Agent Cooper has a mysterious dream about the crime.

The next morning, Cooper meets with Audrey, who confesses to leaving him the note about One Eyed Jack's. Cooper tells Truman he can't remember who the killer was in his dream, but insists the dream is a code to solving the crime. Albert, after offending everyone in town, is forced to end his autopsy early. Albert and Truman come to blows. Bobby, James and Leland all make a scene at Laura's funeral. Laura's identical cousin, Maddy, arrives in town. Norma's husband, Hank Jennings, is up for parole. Cooper has suspicions about Dr. Jacoby. Leland shows signs of cracking.

Cooper questions Dr. Jacoby, who suspects Leo Johnson is the killer. Cooper's supervisor, Gordon Cole, calls in with Albert's report. Josie Packard spies on Ben Horne and Catherine Martell. Hawk tracks down the One Armed Man. Mrs. Palmer tells Cooper and Truman about her vision of the killer, the same man Cooper saw in his dream. Truman and Cooper find that the bird who attacked Laura belonged to Leo's friend, Jacques Renault. Hank Jennings has his parole hearing and makes a threatening phone call to Josie.

Cooper and company have tea with the Log Lady. The Log Lady tells them there was a third man following after Leo and Jacques the night Laura died. At Jacques Renault's cabin Cooper, Hawk, and Truman find Waldo the bird. The bird not only attacked Laura the night she died, but he can also talk. Cooper finds a broken poker chip from One Eyed Jacks. Hank returns home to Norma. The Briggs family visits Dr. Jacoby. Audrey takes a job at the perfume counter where Laura and Ronette worked. Shelly takes her revenge on Leo. Audrey has a surprise for Agent Cooper.