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.
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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.
Ben Horne's brother, Jerry, arrives in Twin Peaks; James 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.
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.
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.
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.
Audrey cons her way into working at the perfume counter where Laura worked. She discovers that it's being used as a recruitment post for One Eyed Jack's. James, Donna and Maddy plan to lure Jacoby away from his office.
Audrey is hired at One Eyed Jack's, but is caught in a trap when her father arrives. Cooper gets Jacques Renault to reveal the details of Laura's last night in the cabin. Deputy Andy saves Truman's life and apprehends Renault.
A wounded Agent Cooper has a vision of a giant who gives him several clues about the murder of Laura Palmer. Shelly and Pete recover from the mill fire, but Josie and Catherine are missing.