Walter is in his office listening to music and doing drugs, and then goes into a flurry of activity, labeling everything in his lab. Astrid comes in and he explains that he decided to get the lab organized, and he's been smoking Brown Betty, a marijuana hybrid. She assures him that Peter will come back but Walter isn't convinced. Olivia comes in and admits that she has something more important to do than find Peter. Ella comes in and they explain to Walter that she's Olivia's niece. Rachel is in Chicago, and Olivia asks Astrid to watch her for a few hours.
Walter and Ella play Operation, and Ella complains that Walter has been eating everything and laughing a lot. She asks him to tell her a story and asks if he ever told Peter stories. Walter admits that he was always too busy, and explains that his mother loved detective stories and musicals. Astrid suggests that Walter tell Ella a similar story and he agrees.
Olivia Dunham is a 40s detective who never solved the mystery of a broken heart. As she packs, a woman named Rachel comes to hire her to find her missing boyfriend. He got in over his head to a gambler named Big Eddie, but Olivia isn't impressed. She warns that Rachel's boyfriend probably got into something that she wouldn't like, but Rachel insists that it was love at first sight.
Walter begins singing, and Ella suggests that he teach her algebra instead. He returns to his story.
Olivia reluctantly takes the case and Rachel says she talked to her boyfriend, Peter Bishop, two days ago on the telephone.
When Ella objects that Olivia doesn't love Peter, Walter explains that it's just a story, and that Rachel didn't know that Detective Olivia once believed in love, so she took the case to see if such great love really existed. He warns that the story gets more frightening, but Ella wants him to continue.
Peter is in hiding with a strange device: a glass heart.
As Walter plays 40s music on his turntable, he explains that Detective Olivia knows some people in low places.
Olivia goes to a bar where Lt. Broyles plays piano. He wonders if she's there to string him along, and Olivia asks him for a favor in return for her keeping secret about when he framed someone to get a promotion. he claims not to recognize the photo of Peter, but when she asks him about a symbol, he tells her it belongs to Massive Dynamic. The company ruthlessly profited on the suffering of the poor and desperate.
Olivia goes to see Massive Dynamic's CEO, Nina Sharp. She identifies Peter as a con man and figures that he's playing Rachel. As Olivia goes, Nina warns her to proceed with caution because Peter is dangerous. Once the detective is gone, Nina calls someone to inform them there's been a development.
As she drives through the streets, Olivia calls Rachel. There's the sounds of a struggle and Olivia drives to Rachel's apartment. Rachel is dead, her chest cut open.
Ella insists that Rachel can't be dead, because that's not how stories work and someone in love doesn't die. Walter warns that things aren't what they seem.
Broyles investigates the murder and explains that Rachel was an actress. They have no idea what weapon was used, and the killer didn't leave any fingerprints. Broyles warns Olivia off but she initially refuses to drop the case now that her interest is piqued. However, she abruptly drops it and leaves… after secretly taking Rachel's address book. Inside it she finds a check to Rachel from a Walter Bishop. She gets his address from directory assistance.
Walter explains that the Walter Bishop in the story is a tinkerer and an inventor.
Walter admits that he hired Rachel to hire Olivia, and he used her to get Olivia's attention. He explains that Peter was his lab assistant and the last name is coincidental, although he loved Peter as a son. Walter has created many things to create happiness, including rainbows, hugs, and singing corpses. However, Peter stole Walter's most important invention: a glass heart. He invented it to keep him alive, but someone stole it when he was asleep. If Walter doesn't get it back, he'll die. He figures that since the heart and Peter disappeared at the same time, Peter stole it.
Olivia's former assistant, Esther Fickelsworth, is trying to get work at a mental institution. She gets a call from Olivia, who figures she'll come to help. A man grabs Olivia from behind and tells her to drop the case, then cuts into her chest with a glowing blade as a warning before going.
Back at the office, Esther arrives to treat Olivia's wound. She warns that Olivia is always looking for true love, something that doesn't exist. Olivia figures that there's got to be a guy out there somewhere who can keep her warm and take her dancing. Esther notices that the wound is healing on its own and Olivia realizes that the blade was a laser and it's the same weapon that killed Rachel. Esther has Olivia draw the object and take it to the patent office. The clerk, Brandon, says that it was patented by Massive Dynamic. Olivia goes to see Nina and shows her the laser blade. When she demands the truth, Nina admits that the quantum laser was developed as a surgical tool, and stolen under mysterious circumstances. She explains that the man who attacked her is one of the Watchers, bald men who speak with an odd cadence.
Ella figures that Nina was lying, and says that she doesn't trust her. Walter admits that she's right, and Olivia didn't trust her either.
Olivia breaks the headlight on Nina's car to trail her after sunset. That night, she follows Nina and calls Esther, who has been running a background check. She confirms that Massive Dynamic was founded by William Bishop, who has since disappeared. Olivia watches as Nina drives to her manor, and then sneaks in and watches as Nina makes contact with Bell and tells him that Peter has the glass heart. She assures Bell that they'll find Peter and the heart, and then they can use it to create a stable doorway between universes so they can be together.
The Watcher knocks out Olivia and takes her to a boat., where Nina comes and explains that Olivia should have listened to her and stayed out of the way. She then tells the Watcher, Mr. Gemini, to place Olivia in a crate, seal it up, and throw her into the river. As water fills the crate, Olivia tries to call Esther and break out. However, a man in a boat rescues her: Peter Bishop.
Peter takes Olivia to the abandoned home he uses to hide out. The only thing there he owns is a map with pinned locations marked. Peter asks if she likes jazz and dancing, and Olivia admits she likes dancing. Peter says he hates dancing, but would take her dancing because it seems like it would be fun. Olivia finally tells him what she knows, that Walter said Peter took the glass heart. Peter says she's been given false information and explains that the map has 147 pins, one for each child that Walter invented. Walter's ideas comes from the stolen dreams of children. When he takes the dreams, he replaces them with nightmares. Peter opens his shirt and reveals that he was born with the glass heart. He was willing to give it to Walter because of all the good he thought he could do, but now he knows better.
Suddenly the house shakes and a mechanical torpedo bursts through the wall. The Watchers attack en masse. Olivia manages to fight them off and they disappear as mysteriously as they came, taking the glass heart with them.
Under Peter's guidance, Olivia uses kitchen parts to place batteries in his chest to keep him alive. She carefully inserts them, avoiding the nerve endings. As she works, he asks her why she wanted to become a detective. Olivia admits that she did it because she cares for people, and Peter asks who cares for her. He admits that it must be nice to know one's place in the world, and that he never did. Olivia finishes but Peter passes out. She sings to him, admitting she's not alone anymore. Peter revives but warns that the batteries won't last long. He says that the Watchers work for Nina, but Olivia says that someone else has the heart.
Peter and Olivia go to confront Walter, who has the heart. Olivia explains that she recognized the mechanical torpedo from Walter's sketches. She figures he's brought the Watchers to his side. They take the heart and Walter insists that he can change and make up for all the harm he's caused. Peter considers, and then says that it's too late and there are some things that can't be undone. They go, leaving Walter alone.
Emma protests that it's not a proper story, She finishes the story her way.
Walter asks for his second chance and Peter realized there was still goodness inside. He split the glass heart in half and each of them were able to use it to survive. Peter and Olivia dance, and lived happily ever after.
Olivia returns and Ella tells her how much fun they had and how she fixed Walter's story. He admits that her ending was much better than his, while Olivia tells him that she had no luck finding Peter.
Later, Astrid drops Walter off at home. Across the street, the Observer watches him, and then makes a call. He tells the person at the other end that Peter has not returned, and Walter doesn't remember the Observer's warning.