The Narrator has just heard from Marla that he is Tyler Durden. He sits in his motel room, and eventually falls asleep. Suddenly, he wakes up—Tyler is standing right in front of him, claiming that they need to “crack down” on the police right away. Tyler angrily accuses the Narrator of talking about him to Marla, breaking his promise.
Tyler clearly told the Narrator not to mention him to Marla because he wanted to make sure that the Narrator didn’t realize that Tyler was his “imaginary friend.” Also note again how Tyler’s appearance is associated with the Narrator “sleeping”—suggesting that he hasn’t really been sleeping at all, but only assuming the identity of his alter ego.
Tyler continues to tell the Narrator about Project Mayhem—there are chapters all over the country. Tyler has been visiting the same cities as the Narrator. The Narrator begins to realize the truth—he and Tyler “share the same body.”
The Narrator has felt a sense of deja vu while traveling through cities recently—that’s because Tyler has been there too, while the Narrator was “asleep.”
Tyler continues to tell the Narrator about “their” plans to attack the police. They attacked the Seattle Police commissioner, who’s been cracking down on fight club and Project Mayhem, and threatened to cut off his testicles. The plan worked perfectly—the commissioner stopped investigated the fight club. The Narrator realizes that he already knew everything Tyler just told him.
Tyler, we realize, has continued to use the space monkeys to enact terrorist plots, while attacking anyone who stands in Project Mayhem’s way (such as the police commissioner). Also, we finally grasp the full meaning of the repeated phrase “I know this because Tyler knows this”: the Narrator and Tyler literally share the same mind.
When the Narrator is awake, Tyler explains, he’s in control—but when he’s asleep, Tyler takes over his body. Tyler’s house is rented in the Narrator’s name; Marla has been having sex with “Tyler,” and thinks of the Narrator and Tyler as the same person—because they are. Tyler tells the Narrator that Marla loves him, or rather, “us.” Tyler Durden, the Narrator realizes, is just his hallucination. The Narrator says, “I was here first,” and Tyler replies, “We’ll see who’s here last.” Suddenly, the Narrator finds himself all alone in his motel room.
Tyler, because he’s more in touch with his libido and his instincts, can see very clearly that Marla is attracted to him—and therefore to the Narrator as well. The Narrator, on the other hand, hadn’t thought of his recent interactions with Marla as being romantic—even though, in Marla’s mind, they were. Tyler and the Narrator, it would seem, are enemies now: they’re fighting for control of “the Narrator’s” body.