After a mysterious shot of a body floating in Loch Ness (reprised near the end), Incident at Loch Ness flashes back to the beginning of a documentary called Herzog in Wonderland being directed by John Bailey with an overview of Herzog's work as he himself begins work for a separate documentary to be called Enigma of Loch Ness, in which he is exploring the Loch Ness Monster myth. Throughout the film, Herzog asserts the Loch Ness Monster is merely a creation of a collective psychological need in society.
As the film continues, Herzog hosts a dinner party to kick off film production. In attendance are his wife (Lena Herzog), several Hollywood celebrities (Jeff Goldblum, Ricky Jay), and the film's crew. Difficulties begin to arise as the untested producer, Zak Penn, attempts to transform Herzog's film into a high-grossing blockbuster. In this attempt, Penn commits several Hollywood clichés such as hiring a beautiful woman (Kitana Baker) for a dubious role as a sonar operator and a self-deluded cryptozoologist (Michael Karnow) for comic relief.
As the shooting progresses, the tension between Herzog and Penn escalates with each revelation that Penn is acting in an underhanded manner. First, it becomes quite apparent the producer has commissioned a fake "Nessie" to be used. Then both Kitana and Karnow are revealed to be actors hired by Penn.
In a twist of events, when Herzog and his crew are working on their film, the crew begins to see what appears to truly be the Loch Ness Monster. Herzog and crew become more and more concerned as first the boat's motor fails and then the "monster" appears to be attacking the vessel in a deepening fog. The crew huddles below decks until the monster returns again to ram the boat hard enough to cause it to begin to sink. Karnow is thrown overboard during another attack, "Nessie" now clearly visible to the crew. Karnow is lost in the fog and presumably eaten by the monster. After Penn and the assistant director (AD), Robert O'Meara, sneak away in the liferaft, Herzog decides to put on the ship's sole wetsuit and swim to shore for help. Before he can do so, however, "Nessie" returns to finally sink the ship. While holding a camera in a water-resistant housing, Herzog captures underwater images of a large creature passing him in the murky, dark water.
The next day, Penn is found by vacationers on holiday and leads them back to recover all but O'Meara and Karnow, who are presumed dead. At this point, it appears that both the documentary film we have been watching and the documentary film we were watching Herzog make could be fictitious. However, this never becomes completely obvious, and the film ends without making it clear exactly who is duping whom.
The entire movie is actually a mockumentary film-within-a-film-within-a-film invented by Penn. The ruse is revealed in Easter eggs hidden on the DVD. Penn wrote what he calls a "scriptment" (part script, part treatment) that outlined the specific structure of the film and including key dialogue that was needed in order to advance the plot, but left most of the dialogue and interaction up to the participants to work out as improvisation.
As shown on the DVD, the "hoax" was on even before photography started as several media outlets announced the upcoming production as an actual film. Adding to the verisimilitude is the fact that everyone who appears on screen is a real person and most are in fact who they say they are. For example, DP Gabriel Beristain and soundman Russell Williams II are well-known, distinguished professionals who did work on the productions they respectively name on screen.
Incident at Loch Ness scored a rating of 62% on Rotten Tomatoes based on 47 reviews. It also received a score of 62 on Metacritic based on 20 critics, indicating "generally favorable reviews".
Critic Roger Ebert enjoyed the film, giving it 3 stars out of 4, saying: "Watching the movie is an entertaining exercise in forensic viewing, and the insidious thing is, even if it is a con, who is the conner and who is the connee?" Kenneth Turan of the Los Angeles Times called it: "an amusing mock documentary that spends considerable energy artfully trying to make you believe it's real as real can be."