During the search for Rachel, Teddy sees a lighthouse but is told it has already been searched. He asks to see the hospital personnel files; Cawley refuses, but allows the Marshals to question the staff. They are frustrated to learn that Rachel's psychiatrist, Dr. Sheehan, left on vacation after her disappearance. That night, Teddy has a strange dream in which he sees his wife Dolores Chanal (Michelle Williams), who was killed in a fire two years earlier. She tells Teddy that Rachel is still on the island, as is Andrew Laeddis, the arsonist responsible for her own death.
After interviewing patients from Rachel's group therapy sessions, Teddy reveals to Chuck his ulterior motive for taking the investigation. Andrew Laeddis was sent to Ashecliffe for his crime and then disappeared, motivating Teddy to investigate the institution. Teddy then met a former patient, George Noyce, who claimed that Ashecliffe experimented on patients, so Teddy is determined to bring the institution down.
Cawley informs Teddy that Rachel has been found and presents her to him without logical explanation as to how she escaped or where she had been. The delusional Rachel (Emily Mortimer) mistakes Teddy for her husband who died in World War II, and then becomes very agitated. Later, Teddy develops increasingly severe migraine headaches accompanied by hypersensitivity to light. In his sleep he has more strange dreams, followed by waking hallucinations mostly related to World War II and the Dachau concentration camp, which he helped to liberate. His dreams and investigations suggest that there is an additional patient on the island that is being kept in secret – he believes this to be Andew Laeddis. As an ongoing storm prevents him from returning home, Teddy becomes determined to search for Laeddis in Ward C, which along with the lighthouse is the only part of the island that he has not been permitted to investigate. Posing as an orderly, he enters Ward C and finds George Noyce (Jackie Earle Haley), who states that the lighthouse is where lobotomies are performed. Noyce tells Teddy that the entire investigation is a game constructed for him, and that Chuck is not on his side.Teddy rejoins Chuck and they head to the cliffs surrounding the island, intending to reach the lighthouse. Chuck and Teddy eventually become separated, and while looking for Chuck at the foot of the cliff, Teddy finds a woman hiding in a cave who claims to be the real Rachel Solando (Patricia Clarkson). She says that she was a psychiatrist at Ashecliffe until she found out about the experiments, and she was forcibly committed to ensure her silence. She explains that the hospital is using psychotropic medication in an attempt to develop mind control techniques and create "sleeper agent" spies. She says that Teddy has been similarly drugged since he arrived on the island.
Teddy returns to Ashecliffe, where Dr. Cawley tells him that he came to the island without a partner; nobody seems to know Chuck. Eventually Teddy makes it to the lighthouse but finds nothing unusual on his way up the stairs, contrary to what he expected. At the top of the lighthouse, he finds Dr. Cawley, who reveals that Teddy is not Edward Daniels, but ex-Marshal Andrew Laeddis. Cawley says that he has been a patient at Ashecliffe for two years since he murdered his manic depressive wife after discovering she had drowned their children. Cawley explains that no such Rachel Solando ever existed. "Chuck" then arrives and reveals himself as Dr. Sheehan, Andrew's psychiatrist, and the woman who was earlier presented as the found Solando turns out to be a nurse. Sheehan and Cawley state that Andrew lived the fantasy of still being an active U.S. Marshal, searching for Andrew Laeddis as a means to disassociate himself from what he had done. They show him that the names "Edward Daniels" and "Rachel Solando" are anagrams of "Andrew Laeddis" and "Dolores Chanal", respectively.
Cawley states that Andrew has gone through repeated cycles of realizing the truth only to regress into his fantasy again, during which he assaulted multiple orderlies and patients. This led the administrative board to demand a lobotomy as a permanent solution to his problem. Sheehan and Cawley explain that they decided to try an experimental therapy, in which they created the role play of Solando's disappearance based on Andrew's fantasy. The entire hospital staff played along with Andrew's fantasy of being an investigator searching for a missing patient. They say they hoped that by failing to uncover his mind-control conspiracy, Andrew would see reality and return to it permanently, and the lobotomy would be called off. Teddy is initially doubtful, but finally appears to accept their explanations.The next morning, Andrew once again calls Sheehan "Chuck" and mentions exposing the Island's doings to the outside world. Dr Cawley's experiment has failed and Andrew has regressed into his delusion again. Sheehan silently signals to Cawley, and orderlies approach to take Andrew for the lobotomy. Andrew asks Sheehan whether it would be worse to "live as a monster, or die as a good man". Sheehan calls Andrew "Teddy," but he does not turn around. He then walks away calmly with the orderlies.
- Leonardo DiCaprio as Teddy Daniels
- Mark Ruffalo as Chuck Aule
- Ben Kingsley as Dr. John Cawley
- Michelle Williams as Dolores Chanal
- Emily Mortimer as Rachel Solando
- Max von Sydow as Dr. Jeremiah Naehring
- Jackie Earle Haley as George Noyce
- Ted Levine as Warden
- John Carroll Lynch as Deputy Warden McPherson
- Elias Koteas as Andrew Laeddis
- Patricia Clarkson as Dr. Rachel Solando
- Jill Larson as Old Manacled Woman
- Ken Cheeseman as Doctor 1
- Ruby Jerins as Rachel Laeddis
- Robin Bartlett as Bridget Kearns
- Matthew Cowles as Ferry Boat Captain


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