Jeffrey Beaumont returns home from college after his father suffers a near fatal stroke. While walking home from the hospital, he cuts through a vacant lot and discovers a severed ear burried under overgrown grass and puts it in a paper bag. Jeffrey takes the ear to local investigator Detective John Williams. When he returns to the Williams house later to discuss the incident further, Jeffrey meets the detectives daughter, Sandy Williams. She tells him details about the ear case and a suspicious woman, Dorothy Vallens. Increasingly curious, Jeffrey devises a plan to sneak into Dorothys apartment that involves posing as a maintenance man. Dorothy becomes distracted when a man dressed in a yellow suit knocks at her door, and Jeffrey steals Dorothy's spare key.
Jeffrey and Sandy attend Dorothy's nightclub performance at the Slow Club. While Dorothy performs at the nightclub, Jeffrey sneaks into her apartment to snoop. He hurriedly hides in a closet when she returns home. However, Dorothy, wielding a knife, finds him hiding and threatens to hurt him. When she realizes he is merely a curious boy, she assumes his intentions are sexual in nature, and is turned on by his voyeurism. She makes him undress at knifepoint, then fellates him. Frank Booth interrupts their encounter with a knock on the door. Dorothy urges Jeffrey to return to the closet and witnesses Frank's bizarre sexual proclivities, which include erotic asphyxiation, dry humping, and sadomasochistic tendencies. Frank is an extremely foul-mouthed, violent sociopath whose orgasmic climax is a fit of both pleasure and rage. When Frank leaves, a saddened and desperate Dorothy tries to seduce Jeffrey again. She demands that he hit her but when he refuses she demands to be left alone. Jeffrey again observes Dorothy's nightclub show at the Slow Club, where she performs Blue Velvet by Bobby Vinton. Frank is also present at the nightclub. Later, in the car park, Jeffrey watches Frank and his cohorts drive away before going to Dorothy's apartment again.
Frank catches Dorothy and Jeffrey together, and forces them both to accompany him to the typically Lynchian house of Ben, a suave, feminine and partner in crime. In a bizarre scene Ben mimes the singing of Roy Orbison's "In Dreams", sending Frank into maudlin sadness, then rage. He takes Jeffrey to a milling yard and savagely beats him to the overture of "In Dreams". Jeffrey wakes the next day and goes home, where he is overcome with guilt and despair. He decides to go to the police. At the police station, Jeffrey notices that Sandy's father's partner is Gordon the Yellow Man. Later at Sandy's home, her father is amazed by Jeffrey's story, but warns Jeffrey of the danger of the situation. Jeffrey and Sandy go to a dance party together, profess their newfound love and embrace. When they're tailed on their way home, Jeffrey is relieved to discover that it's only Sandys football-playing ex-boyfriend. A confrontation is avoided when they see a naked and distressed Dorothy waiting on Jeffreys front lawn.
From the hospital, Jeffrey tells Sandy that he must return to Dorothy's apartment and tells Sandy to send her father there immediately. When he arrives back at Dorothys apartment, he finds the dead bodies of The Yellow Man and Dorothys husband, who is missing an ear. When he tries to leave, he sees The Well Dressed Man coming up the steps and recognizes him as Frank. Jeffrey talks to Det. Williams over the police radio but lies about his location inside the apartment. Frank enters the apartment and brags about hearing Jeffrey's location over his own police radio. When Frank fails to find Jeffrey in the bedroom, he returns to the lounge. Jeffrey shoots Frank with the Yellow Man's gun. Det. Williams arrives with Sandy in tow. Days later, we see Jeffrey and Sandy together, with their lives back to normal, and before the credits, Dorothy and her son playing happily in the park together.