The film begins with us learning that Leonard has a condition that causes him to have no short-term memory. He forgets things moments after they occur. We then are introduced to Teddy, of whom Leonard has a Polaroid photograph which has "Don't believe his lies" written on the back. Leonard has had no short-term memory since the rape and murder of his wife, and he is intent on killing the man, "John G.," who he believes did the deed. Believing Teddy is the culprit, Leonard takes Teddy to an abandoned building and shoots him in the head.
The film moves in reverse chronological order. We are next introduced to Natalie, a vulnerable bartender, whom Leonard is helping to get away from a lunatic boyfriend who believes she stole money from him. She allows Leonard to stay with her and she helps him to get information about John G. Her research reveals that Teddy is John G., and she gives him a picture of his license and license plate number as proof.
Leonard has tattoos all over his body—all facts about the man he is after, all of which he must read anew each day. In black-and-white sections that move in normal chronological order, and which are intercut with the main story, Leonard speaks to an unknown caller on the phone and tells them a story about his past. He describes how he used to be an insurance investigator who worked on a case for a man named Sammy Jankis, who suffered from short-term memory loss. At the time, Leonard says, he rejected Sammy's insurance claim, believing Sammy was lying. In this story, Sammy's wife became so upset with the thought that her husband could be faking his memory loss, that she tricked him into killing her with repeated insulin shots, trying to prove to herself whether he could really remember.
Back in the reverse-chronological main story, we come to see that both Teddy and Natalie have been manipulating Leonard due to his condition, but we do not understand who is working for whom. In the black-and-white timeline, we finally learn that the person Leonard is talking to on the phone is Teddy. He feeds Leonard information that leads Leonard to kill various people with the initials "J.G.," including Jimmy Grantz, Natalie's drug-dealer boyfriend. After he kills Jimmy, thinking Jimmy was his wife's killer, the (forward-chronological) black-and-white sequence merges with the (reverse-chronological) color sequence, and we find ourselves at the moment proceeding the beginning of the film. Teddy arrives at the scene, and Leonard, confused, demands information from Teddy. Teddy says that Leonard killed his wife's assailant over a year ago, and when that didn't correct his memory problem, Leonard wanted to keep working for Teddy. Knowing that Leonard won't remember the conversation, Teddy reveals that he has been using Leonard for his own gains, and also reveals that the story about Sammy Jankis was not true—just a way Leonard used to make himself feel less guilty about his wife's assault. In fact, Teddy says, Leonard's wife survived the assault, and in fact, it was she who had diabetes. The story about Sammy Jankis is actually a story about Leonard. Leonard himself killed his wife with repeated insulin shots.
Leonard refuses to believe Teddy, and is enraged that Teddy has been using him and making him kill people who are not his wife's killer, and so he makes a note on his Polaroid picture of Teddy that he is not to be trusted. He also takes down Teddy's license plate number to get it tattooed on his body, so that his future, forgetful self will think that Teddy is his wife's assailant. He drives off—soon to kill Teddy, as we saw represented in the beginning of the film.
