In August 2006, a "burglary" occurs at the home of Kristi (Sprague Grayden) and Daniel Rey (Brian Boland), trashing their house and leaving only their infant son Hunter's bedroom untouched. The only thing stolen is a necklace that Kristi's sister, Katie, gave to her. Martine, the Latin American family housekeeper and nanny, goes into Hunter's room after hearing a loud bang and senses something inside the room. She takes him downstairs and attempts to cleanse the house of "evil spirits" but Daniel arrives home and catches her burning sage. As a result, Martine is fired.
Kristi believes that their home is haunted and tells Daniel; Daniel reviews the footage but dismisses her claim. Katie and Kristi talk about being tormented by a demon when they were children. Daniel's daughter from a prior marriage, Ali (Molly Ephraim), begins investigating the mysterious happenings; she discovers that humans can make deals with demons for wealth or power by forfeiting the soul of their first-born son, but if the deal is not fulfilled, the demon will stick to the family until another son is born—Hunter was the first male to be born on Kristi's side since the 1930s.
The violence escalates; the family's German shepherd, Abby, who had been guarding Hunter at night, becomes aware of the demon's presence and is attacked and apparently suffers from a seizure. Daniel and Ali take Abby to the veterinarian, leaving Kristi alone with Hunter. When checking on the baby, Kristi is attacked and dragged into the basement by the demon, possessing her. The following day, Ali is left home with Kristi, unaware she is possessed. Soon, Ali hears a scratch sound in the basement door and opens it to find scratches and sees a word, meus (Latin for "Mine"), etched into it. Ali is terrified by Kristi's behavior.
After noticing a strange bite mark on her leg and discovering the footage of Kristi’s attack, Ali begs Daniel to come home; after he arrives, she shows him the footage. Daniel immediately calls Martine, who prepares a cross to exorcise the demon; Kristi will have no memory of having been possessed. Daniel goes to pass the demon onto Katie so that Kristi and Hunter will be saved, despite Ali's pleas not to.
That night, when Daniel tries to use the cross on Kristi, she attacks him and the houselights all go out, plunging everyone into darkness. Using the handheld camera's night vision, he finds Kristi and Hunter have disappeared. Furniture begins toppling over, and the chandeliers shake. Daniel chases Kristi into the basement, where she attacks him. He touches her with the cross, causing her to collapse. Daniel hears demonic growls and finally, the shaking stops. Daniel puts Kristi to bed and burns a photo of a young Katie, passing the demon onto her.
Three weeks later, Katie visits and explains that strange things have begun happening at her house. On October 9, a night after Micah is killed, a possessed and bloodstained Katie breaks into the house, kills both Kristi and Daniel then takes Hunter with her. The screen then fades to black.
An epilogue text states that Ali was on a school trip and returned home, found the bodies of Daniel and Kristi three days later, and that Katie and Hunter's whereabouts remain unknown.
Sprague Grayden as Kristi Rey
Brian Boland as Daniel Rey, Kristi's husband
Molly Ephraim as Ali Rey, Dan's daughter
Katie Featherston as Katie, Kristi's older sister
Micah Sloat as Micah
Seth Ginsberg as Brad, boyfriend of Ali
Vivis Cortez as Martine, the nanny / housekeeper
Jackson Xenia Prieto and William Juan Prieto as Hunter Rey, Dan and Kristi's infant son
prequel to the 2007 film Paranormal Activity