Blue Velvet is arguably Lynch's second breakthrough - The film stars Lynch regular Kyle McLachlan and the legendary Dennis Hopper. After the failure of Dune, Lynch tried a more surreal film; within a suburban context which resulted in Blue Velvet. Critics and audiences consider Blue Velvet one of Lynch is most seminal and analysed films.
In the small logging town of Lumberton, Jeffrey Beaumont returns home from college after his father suffers a near fatal stroke. He stays with his mother and Aunt Barbara while he takes over working at the local hardware store that his father owns. 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 the police station and speaks to Detective John Williams whom he knows as a neighbor.
Later that evening, Jeffrey goes to Williams' house later to discuss the incident further, he finds the detective elusive about the case and tells Jeffrey not to talk about what he found to anyone for it is an ongoing police investigation. Outside the house, Jeffrey meets the detective's daughter, Sandy Williams. She tells him details about the ear case and a name she overheard from her father of a woman being investigated, Dorothy Vallens, who also lives in the neighborhood. Increasingly curious, Jeffrey devises a plan to sneak into Dorothy's apartment that involves posing as a maintenance man.
The next day, Jeffrey picks up Sandy from her high school and they drive over to the apartment building complex where Dorothy lives. While Jeffrey asks Dorothy to let himself into the apartment, she becomes distracted when a man dressed in a yellow suit talks to her at her door, and Jeffrey steals Dorothy's spare keys.
That evening, 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, but does not hear Sandy's signal to leave. He hurriedly hides in a closet off the living room when the door is opened. 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 excited 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 he witnesses Frank's bizarre sexual encounter with Dorothy in her living room, which include gas inhalation/asphyxia with a mask, dry humping, and masochistic acts. 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 also hit her but when he refuses she demands to be left alone. The next day, Jeffrey tells Sandy about what he saw and concludes that Frank might have kidnapped Dorothy's husband and young son and using them as bargaining chips to allow himself violent sexual advances towards her.
The following evening, 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 three cohorts, Raymond, Paul, and Hunter drive away and follows them to Frank's apartment building in a desolate industrial area. Jeffrey returns and spends all night and day staking out the building and photographing Frank and his visitors, which include the man in the yellow suit and a meeting between this man and a well-dressed man with a briefcase. He also follows Frank to a location where he is seen pointing in the distance to a gruesome drug-murder crime-scene investigation by the police.
After reporting to Sandy that Dorothy is involved in serious and disgusting problems, he goes to Dorothy's apartment again and makes love to her in her bed. Just as he is leaving, Frank and his thugs arrive at the building. and forces them both to accompany him on a "joyride", which ends up at the typically Lynchian house of Ben, a suave effeminate partner in crime. In a bizarre scene Ben mimes the singing of Roy Orbison's "In Dreams", sending Frank into maudlin sadness, then rage. Back on the road, Frank becomes more brutish and confrontational, taunting Dorothy as well as Jeffrey who punches him as he is driving. Frank and his thugs drive Jeffrey to a sawmill yard and they savagely beat him to the overture of "In Dreams". Jeffrey wakes up on the ground the next morning and goes home, where he is overcome with guilt and despair. Jeffrey finally decides that things have gone too far and he decides to go to the police. At the police station, Jeffrey sees that Detective Williams partner, Detective Gordon, is the Yellow Suit Man and hurriedly leaves. Later, going to Sandy's home, her father is amazed by Jeffrey's story, but warns Jeffrey of the need to keep quiet because of the danger of the situation.
A few days later, Jeffrey and Sandy go to a dance party together, profess their newfound love and embrace. When they're followed on their way home, Jeffrey is relieved to discover that it's only Sandy's 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 at Dorothy's apartment, he finds the dead bodies of Detective Gordon, and Dorothy's 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 in disguise. Jeffrey talks to Det. Williams over the dead detective's police radio, but remembering seeing Frank with a police radio, lies about his location inside the apartment. Across town, Detective Williams and his men are engaged in a gunfight with Frank's thugs at his apartment, and Jeffrey is on his own. Frank enters Dorothy's apartment and brags about hearing Jeffrey's location over his own police radio. When Frank fails to find Jeffrey in the bedroom as he said on the radio, he returns to the living room. Upon Frank's opening the closet door, Jeffrey shoots him point-blank in the forehead with Det. Gordon's gun. Det. Williams arrives with Sandy in tow, and continues pointing his gun at Jeffrey a little longer than the viewer is comfortable with.
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.