At the bowling alley, Olivia meets with Sam Weiss, who says she needs something to help her with everything she's been going through, something to make senses of it all. He has a new project for her and writes something down on a piece of paper. He folds it and gives it to her, and says he hopes she doesn't have anything against the color red.
In Seattle, Washington, Greg Leader comes into work and one of his co-workers warns that his boss Carl Langdon is pissed at him. As Greg goes to see Carl, he sees his co-workers as hideously distorted demons. Greg enters the conference room and hits Carl with his briefcase. He beats him repeatedly in the head, his eyes twitching wildly in their sockets, until Carl's assistants pull him off.
Peter and Walter are moving into their new home. Peter is surprised to see Walter setting up his bed in the living room. Astrid arrives with a housewarming gift of Italian ciabatta bread for Walter and a report on Greg's case in Seattle. Peter tells Walter to pack a bag.
In Seattle, the team goes to the hospital and Olivia gets the business card of the taxi driver in case they need a ride later. The officer in charge, Detective Green, explains that Greg hasn't been responsive since they brought him in sixteen hours ago. The doctors just managed to wake him up. Walter sees the man strapped down and says he doesn't want to go in. Olivia and Peter talk to Greg, who explains that he remembers driving to work, blacking out, and finding himself over the injured Carl. He admits that in the office, he saw the workers as demons and Carl as their leader. Greg starts to panic and Peter calls Walter in. As Greg's wife watches from the door, Greg's hair and skin turn white and he dies.
Walter performs an autopsy and realizes that the body is much warmer than it should be. He starts to panic again and Peter wonders what the problem. Before Walter can answer, the coroner arrives with the tox screen and Walter already knows there are high levels of adrenal hormones and thyroxine deficit. Achromotrichia and skin lesions confirm Walter's diagnosis that Greg died of extreme exhaustion. He tells the coroner he needs the body taken back to Walter. When Peter say they have everything there, Walter complains that Seattle has a wet smell and it reminds him of the mental institution where he was held. Peter agrees to find someone to take him home and FBI agent Kashner agrees to get him back safely. Peter warns him not to let Walter drink given all the drugs in his body. Olivia talks to the medical examiner and asks for his business card so she can call him later.
Olivia and Peter go to the Leiter house to talk to Greg's wife, who says that her husband was sometimes tired but otherwise didn't seem to have any problems. Peter notes books on sleep disorders and the woman explains that Greg used to sleepwalk but he was ever violent. Olivia gets the names of the doctors and Peter asks to see Greg's sleep journal.
Back in Boston, Walter and Astrid prepare to examine the body while Agent Kashner deals with the fact their bags were held at the airport because of Walter's bottles of raw milk. Walter finds an unusual incision with nine stitches and prepares to cut it open. When Kashner finishes with his call, Walter asks him to help remove the corpse's scalp.
Peter goes to see Olivia in her hotel room and show her the sleep journal. Greg was getting a normal night's sleep, but all of his nightmares were about demons. Two months ago, the nightmares stopped. Peter explains he had the same type of nightmares as a child and admits that Walter taught him to condition himself to forget the nightmares. They get called when another incident occurs. A woman, Ellen Rosiello, died and was talking to her husband on the phone as she went out of control and attacked people. She claimed that she saw demons as she died.
Walter performs the autopsy and finds a filament and computer chip in Greg's midbrain near the thalamus. The thalamus regulates sleep. Peter checks Ellen's corpse and finds a similar incision.
At Massive Dynamic, Broyles meets with Nina, who has had her people analyze the chips. She explains that it's a bio-chip that lets someone using a remote computer control the victim. It monitors sleep cycles and stimulates the thalamus to induce a deeper sleep stage. Dr. Laxmeesh Nayak has been working on a prototype and has a clinic in Seattle. Olivia and Peter go to see Nayak, who confirms both were patients and they had the bio-chips as part of a study. He explains that 60 other people had chips implanted as part of a group study.
They go to his clinic and discover that his office has been torn apart and his main computer server stolen. He gives Olivia the password for the remote server and his research assistant Zack comes in. As Nayak has him get the patient names, the doctor explain to Olivia that the chip has cured dozens of different sleep disorders and it couldn't make anyone hurt someone else. Olivia collects his business card and then admits to Peter that Nayak doesn't have any apparent motive. Peter suggests that the chip could also be used for mind control. They check with Walter, who admits it's theoretically possible. Peter prepares to send him an internal schematic so Walter can test the chip he has. Walter wants to use a neutral environment but Peter tells him not to use student volunteers. As Agent Kashner arrives with the bags, Walter reluctantly promises not to use student volunteers.
Peter returns to the hotel and tells Olivia that Walter believes someone is testing the chip, one patient at a time. Nayak has only been able to produce the names of 26 patients and the Seattle PD has rounded them up and taken them to the clinic for chip removal. As they go over the files, Olivia notices a photo of Charlie and Peter tries to comfort her, insisting the thing she killed wasn't Charlie. Olivia talks about how she was caught in an awkward situation on her first assignment and Charlie was the one who reassured her. Overwhelmed, she goes to the clinic to help identify the patients.
Nayak's assistant Zack Miller is working with a man at a computer who is literally wired into the circuitry. Zack brings up a list of Nayak's patients, chooses one, and accesses the bio-chip. Zack's superior tells him to increase the dose. At a restaurant, Diana is cooking and clutches at her head in pain. She sees human hands on the grill and watches as one of her fellow cooks dishes them up. The woman grabs a knife and attacks the man.
Walter is working in the lab when Agent Kashner informs him he's heading back to Seattle. Before he goes, Walter asks him to smell a bottle of chemicals. Kashner sniffs it and passes out.
In Seattle, Nayak continues to remove the chips from the patients. Olivia is in the lobby and gets a call from Sam, who asks if she got the business cards. She informs him that she got eight from everyone wearing red. Sam tells him to lay them out in front of her and circle one letter from each first and last name. He then tells her to jumble them and find the hidden phrase. When she wonders what she's looking for, Sam tells her she'll find what it is she needs to hear. Broyles calls her and tells her that the backup server was wiped in the last 24 hours. The technicians believe it was an insider from the clinic.
Olivia tells Nayak, who insists that all of his employees are trustworthy. Peter arrives to tell Olivia that that they've had another incident. They go to the restaurant and Nayak admits that Diane had night terrors. He also remembers that Zack skipped work and hasn't been answering his calls. Peter and Olivia go to Zack's apartment.
At the sleep clinic, Nayak finds a note on his office door. It says not to say anything to the FBI or he'll end up like Zack.
Peter and Olivia find Zack, dead and stuffed in a wardrobe.
Astrid returns to the lab to find Walter working on an unconscious Agent Kashner. He admits that he didn't put the chip in the agent's head, but attached it to an EKG net instead. Walter plans to use his neurostimulator to make contact and try to control him. Walter initially doesn't have any luck but then starts to hallucinate. He realizes it's not drugs but something else.
Nayak shows Olivia and Peter the note. They send it to the FBI for analysis and put a protective cordon around the clinic. Once they're gone, Nayak dials a number and leaves a message saying he showed them the note and the people threatening him should stop.
Walter calls to explain that the chips are transmitting massive amounts of data, every sensory input that passes through the thalamus. The chips steal dreams, preventing the brain from recharging and thus leading to death by execution. Walter believes the chips can also activate a dreaming state in a conscious person, causing paranoia and hallucinations. Someone accessing the sensory rush would have a highly addictive experience, and whoever encountered it would become a slave.
Olivia goes back to the hotel and goes over the patient files. She figures that their target would have an extreme rift between two personalities, the sober and the addicted, and one might not know the other. She checks the handwriting against the patient list and realizes both were done in the same handwriting: Nayak's.
Detective Green escorts Nayak to his home. The doctor plays back his own message and then goes downstairs where he keeps his equipment. He brings up the file of an airplane pilot who received treatment and taps into the man's bio-chip. The pilot, Jack, is flying a passenger seaplane when Nayak takes control of him and invokes a dream state, causing the man to see his co-pilot as a faceless demon. Jack flies the plane toward an ocean liner.
Olivia and Peter go to Nayak's home and try to shut down the device. When Peter can't shut it down, Olivia shoots the computers. Jack manages to regain control and they miss the liner with seconds to spare. Nayak dies and Green informs them that the passengers on the seaplane are safe. Peter explains that all of Nayak's controls were cranked to the red and he figures that Nayak finally realized what he was doing and put an end to his life and his nightmares rather than kill anyone else.
Back in Boston, Olivia goes to Charlie's grave and places flowers. As she prepares to leave, she goes back to the anagram and unscrambles it to reveal the phrase "You're gonna be fine."
Peter dreams of himself as a child, his father standing over him. He wakes with a start to find Walter sitting nearby. Walter says he was talking in his sleep and Peter admits he was having a bad dream about his childhood. He doesn't remember much of it and Walter appears relieved.