The villains manipulate the entire film to successfully kill the family. The film ends with them approaching a new family and re-starting the "game."
Note: Director Michael Haneke made this (and the remake) as an indictment of viewer expectations and desire for violence in cinema.
We open on a happy family driving to their secluded lake house. The family consists of father Georg (Ulrich Mühe), mother Anna (Susanne Lothar), 10-year old son Georgi (Stefan Clapczynski) and their dog. As they drive in, they see their neighbor Fred with two college-aged boys and ask if Fred can come help them load the boat into the water.
Georg and Georgi go to the water and are soon joined by Paul (Arno Frisch), one of the teens who was with Fred, to help them load the boat into the water. Paul is also introduced to another family living on the other end of the lake who stop by to say hi to Georg. Meanwhile, the other teen named Peter (Frank Giering - the teens also use multiple names for each other throughout the film) asks to borrow eggs from Anna, who is preparing dinner in the house.
Peter keeps "accidentally" breaking the eggs and also "mistakenly" drops the house phone into a sink full of water. Soon, Paul also comes inside and the two make Anna feel very uncomfortable, especially when they refuse to leave. Further, the dog continuously barks at the teens. After hearing the dog howl in pain, Georg and Georgi return to the house where Georg asks the two teens to leave, though they refuse to do so without the eggs. The teens get even more aggressive, causing Georg to slap Paul in the face. In response, Peter smashes Georg's leg with a golf club, completely shattering his knee.
At this point the teens take the family hostage. We also learn that Paul appears to recognize he is in a film, constantly looking directly at the camera and talking to the viewer (the family seems wholly unaware they are in a film). Anna discovers that Paul has beaten the dog to death with a golf club. The teens give multiple possible accounts of their motivations (they are drug users, they had a bad childhood, they are simply sadistic and evil) and begin physically and psychologically torturing the family while playing "games" with them. Peter then makes a bet with the family that none of them will be alive by 9:00 the next morning (he notesthat the viewer is probably rooting for the family, acknowledging that this is the kind of bet a viewer makes when they watch a violent film - that the "hero" will live to the end).
At some point Georgi manages to escape and runs to Fred's house, where he finds that Fred's family has also been killed by the teens. He tries to shoot Paul, who has followed him there, but the gun does not go off and he is brought back to the house. Paul puts Peter in charge of watching the family while he makes something to eat. We hear a gunshot and Paul walks in to find that Peter shot Georgi (who had again tried to escape). Noting that the tension is gone and the game is no longer entertaining to the viewer (children rarely are killed in violent films and are usually the focal point of the drama), the teens leave.
After a painful mourning process, Georg and Anna free themselves and Georg attempts to fix the phone while Anna runs outside to look for help. Apparently, their attempts to get help re-ignite the interest of the teens, who re-capture Anna and take her back to the house. While playing more "games" with Anna, she manages to take them by surprise and grab a gun, fatally shooting Peter. Paul flies into a rage, finds a TV remote control and "rewinds" the film so that he can grab the gun out of her hands and allow Peter to live. They then kill Georg for Anna's failure to play by the rules.
The two then bind Anna and take her out on the lake in the boat. The teens discuss physics and questions of the nature of reality (essentially suggesting that the two can travel through different realities - although Anna thinks her reality is the only one). Anna finds a knife on the boat and tries to cut through her bindings (as often happens in violent movies), but Paul sees her attempts and takes the knife away. Peter tells Paul it is 8:00 AM, so Paul throws Anna overboard to drown (thus winning the bet).
The film ends with the teens pulling into the dock of the neighbors' house who Paul had met earlier in the film. Paul knocks on the front door to ask the mother for some eggs and she invites him in. Paul grins knowingly at the viewer as he walks into the house (likely anticipating the viewer's desire to see more violence despite the pain it will cause this new family).