Young Henry hears his father being torn apart behind him and runs through the moors. Come morning, he finally makes his way to the hills and where an old woman is walking her dog. When she asks what is wrong, Young Henry looks at her dog and screams in terror.
Now, Henry Knight is standing in Dewar's Hollow and stares around him surprise and shock.
Sherlock returns to 221B Baker St., having solved his most recent case with the aid of a harpoon. However, he's soon bored again and on edge due to nicotine withdrawal. John refuses to help him with his problem and warns that nobody else in the area will sell Sherlock cigarettes. When Mrs. Hudson comes in, Sherlock launches into a tirade, pointing out that she's dating the downstairs diner owner but that he has a wife. When Mrs. Hudson leaves in tears, John tells his friend to apologize but Sherlock prefers to focus on himself, insisting that he can't stand boredom. When John suggests that he check the blog, Sherlock notes that the only person asking for help is a young girl, Chrissie, who claims she has lost her glow-in-the-dark rabbit.
Henry arrives at their doorstep and asks them to take his case. He shows them a documentary about Dartmoor, the Grimpen Moor, and the nearby Baskerville military research base. According to the presented, the Baskerville experiments have been going on for years. The presenter then talks to Henry, who explains that he saw his father torn apart by a gigantic black hound with glowing red eyes. Sherlock tells Henry to describe what happened and the man tells him that his father took him on walks near Dewar's Hollow after Henry's mother died. The hound attacked his father and Young Henry ran in terror. His father's body was never found and Henry explains that his father always believed that the Baskerville scientists were breeding monsters.
When John wonders why he came to them after 20 years, Sherlock realizes that something just happened to Henry to bring the memories back, something so recently that Henry came immediately to London and didn't stop to smoke. He invites Henry to light a cigarette and inhales the smoke, while Henry explains that his therapist, Dr. Louise Mortimer, believes that he invented the delusion of a hound killing his father to protect himself from some trauma. However, Henry insists that he's found paw prints in Dewar's Hollow and that the beast is real. Sherlock dismisses them as inconclusive, but Henry tells him that they were the paw prints of a gigantic hound. Suddenly intrigued, Sherlock has Henry repeated the exact words he just spoke, "paw prints of a gigantic hound." He then agrees to take the case but says that he's too busy with the missing rabbit, Bluebell, and will send John. However, Sherlock then changes his mind and decides to go with John to Dartmoor.
When Sherlock and John arrive in Dartmoor, they take in the local landmarks, including Baskerville Base, and then go to Grimpen Village. A young local man, Fletcher, is preparing to give tourists a walking tour of the moors and a chance to see the Demon Hound.
Louise Mortimer visits Henry at home for his therapy session and he describes his memories, as well as two words that he remembers seeing in his dream: "Liberty" and "in."
As John talks to Gary, the pub owner where they're staying, he notices an invoice for a large order of meat and quietly steals it. Sherlock looks around while John talks to Gary and the bartender, Bill. He examines the map and points out the skull and crossbones, and Gary explains that they indicate the Grimpen Minefield that the army has put up around Baskerville. He explains that the tourists have flocked to Grimpen Village since Henry's story of the Demon Hound went out. When John wonders if anyone has seen it, Gary suggests that he talk to Fletcher, who claims to have seen the Hound.
Sherlock overhears their conversation and goes outside to talk to Fletcher, claiming he has a bet with John about whether the local actually saw the Hound. When John comes out, Fletcher helps him win his "bet" by telling them that he saw the Hound a month ago and has a photo of it. Sherlock is unconvinced but Fletcher tells him that the Hound is one of Baskerville's experiments and escaped. As further proof, Fletcher tells them that he had a friend with the MoD who came to Grimpen Village but disappeared en route. When he reappeared, the friend claimed that he saw something and had been sent to a secret government facility, and saw giant mutated creatures. Finally Fletcher shows them a plaster cast that he made of one of the Hound's paw prints and Sherlock appears convinced.
Sherlock and John drive to Baskerville and Sherlock bluffs his way in using a government ID that he stole from his brother, Mycroft. He warns John that they only have 20 minutes until the security squad checks the ID and confirms that something is wrong. Corporal Lyons arrives to escort them through the base but is surprised that they are holding an inspection since it's the first time the government has sent anyone. John takes over, bluffing his way through using his experience in the army, and Lyons stops questioning them. However, he warns that the man in charge, Major Barrymore, won't be happy at their presence.
Lyons takes the friends into the labs where numerous animals are kept for animal experimentation. One of the scientists, Dr. Frankland, comes over and chats with them briefly. Lyons admits that most of their research is to develop weapons, and leads them to Dr. Stapleton. Sherlock thinks that her name sounds familiar and asks what she does, but Stapleton dodges his question until he reminds them that their representing the government. Stapleton reluctantly admits that she does genetic research, and Sherlock remembers who she is. He asks her why Bluebell had to die and then tells John that the last name of the young girl with the missing glowing rabbit was Stapleton. The scientist wonders why they care about her daughter's rabbit, but Sherlock realizes that they're out of time and heads for the exit.
Base security flags Mycroft's ID and calls him, and he texts his brother. Sherlock ignores him and they take the elevator up to the ground floor, along with Frankland who is going up as well. Barrymore is waiting for them and demands to know why he wasn't informed about the inspection. Lyons gets a warning alert and sets off the alarms, and Barrymore is ready to arrest them. However, Frankland tells Barrymore that he knows Sherlock... as Mycroft. Barrymore reluctantly shuts down the alarms and lets them leave, but warns that it's on Frankland's head.
As Frankland accompanies them to the gate, he explains that he knows who they are from John's blog and Sherlock's website, and that he was friends with Henry's father and knows about Henry's problems. Frankland gives Sherlock his cell phone number in case he wants to consult with him, but refuses to tell them what he or Stapleton do at Baskerville.
Sherlock and John go to see Henry. As they drive, Sherlock tells his friend that Stapleton was experimenting on Bluebell, modifying its genetic structure so that it would glow in the dark. However, he suspects that she may be pursuing more dangerous research. When they arrive at Henry's home, John is surprised to discover that it's an expensive home. They have tea and Henry tells them about the two words from his dream. Sherlock doesn't know what they mean and tells them his plan: they'll take Henry out on the moor that night and wait for something to attack him.
That night, the three men go to Dewar's Hollow. John hears something and turns back, and is separated from the others. He sees a flashing light on a hill and realizes that it's in Morse code, and writes down the word: UMQRA. The light goes out after flashing the word and John goes to find the others.
As they go to Dewar's Hollow, Sherlock mentions Frankland and Henry tells him that "Uncle Bob" is a worried and been kind to him ever since Henry came back. Sherlock notes that Henry's father believed the worse of Baskerville despite the fact that Frankland worked there, and Henry explains that the two men never talked about Baskerville or Frankland's job.
As John walks through the words, he finds a leaking metal sewer pipe. He hears something moving behind him as a shadowy creature moves through the woods.
Sherlock and Henry enter Dewar's Hollow as the fog rises. They hear something and Sherlock up and sees something on the edge of the hollow. He goes up to investigate but finds nothing, and John arrives. Henry saw the same thing that Sherlock did and insists that he wasn't imagining things, but Sherlock claims that he didn't see anything. They take Henry back to his home and John gives him a sedative to help him sleep. Henry wonders why Sherlock lied and insists that they both saw the Hound.
Back at the pub, Sherlock sits by the fireplace and contemplates a glass of whiskey. John comes over and asks him about UMQRA, but Sherlock is clearly in shock. He finally admits that he did see the Hound and that he felt fear. John tries to reassure him but Sherlock insists that there's nothing wrong with him and conducts an amazing series of deductions to prove that he's fine. He finally angrily tells John that he has no friends. Startled and hurt, John says that he can understand why and leaves. Outside, John sees the same light flashing out on the moor and goes to investigate it.
Despite the sedative, Henry wakes up from another dream where he sees the words "Liberty" and "In."
John follows the light to its source and discovers that it's the head lights of a car on Lover's Lane, and the "Morse code" was caused by the car bouncing up and down due to the occupants. Embarrassed, he heads back to the pub and receives a text message from Sherlock suggesting he talk to Louise, who is drinking there. John texts back asking why he should and Sherlock responds by sending him a photo of the attractive doctor.
Henry can't get back to sleep and turns on the television. However, he's startled when the yard lights go on and off, and then back on again. Something moves in the shadows and Henry goes to the patio window. An animal slams into the glass as the lights come up again and Henry collapses to the floor, sobbing.
Back at the pub, John flirts with Louise, shares a bottle of wine with her, and tries to get her to talk about Henry. She refuses to violate patient-doctor confidentiality and discuss Henry or his father. When Louise mentions Henry's paralyzing fear, John comments that he has a friend with the same problem. Frankland comes over and asks John about the investigation, and explains that John lives with Sherlock in London and solves crimes. Realizing what John wants, Louise walks off.
The next morning, Sherlock visits Henry at home. Surprisingly, he offers to make him coffee but then pockets his sugar from the cupboard. When Henry asks why Sherlock lied about what he saw, Sherlock asks him why he used the archaic term "hound" when describing the paw prints, and explains that it was Henry's usage that piqued his interest.
As Sherlock leaves, he sees John in the nearby graveyard and goes to talk to him. He tries to chat with his friend, who is still upset about his "no friends" comment the previous night. Sherlock apologizes, admitting that he felt doubt for the first time, but says that he told the truth because he only has one friend, not several. John isn't interested and walks away, but Sherlock gets an idea from their conversation and realizes that HOUND must be an acronym.
Back at the pub, Sherlock and John discover that Lestrade is there. Sherlock realizes that Mycroft sent him but Lestrade denies it. John decides to take advantage of his presence by asking Lestrade to apply official pressure to Gary and find out about the invoice. Lestrade agrees and interrogates Gary and Billy, while Sherlock makes some coffee with sugar for John as a gesture of apology. Gary finally admits that they found a dog and let it loose so that they could claim it was the Demon Hound and bring in tourists. They kept it in a mine shaft, but Gary claims that it grew too vicious to control and Billy took it to a vet to kill.
Satisfied that he's solved the case, Lestrade goes out and John and Sherlock follow him. Lestrade points out that he can't charge the couple with anything and takes off. Sherlock believes that there's more and describes what he saw to John: a giant black hound that glowed in the dark and had red eyes. He then tells his friend that he needs to go back to Baskerville to test his theory and starts calling Mycroft.
Back at Baskerville, the guards let the two men in. Sherlock sends John to search the labs while he meets with the major. In private, Sherlock tells Barrymore that he's been given unlimited access for 24 hours. The major has no choice but to agree with the government order, but warns Sherlock that he won't find anything.
At home, Henry is sitting on the floor whimpering, holding a photo of his father. He gets another memory flash of his father's death and screams.
John goes to the lab as the scientists are closing down the facility. As he goes through Stapleton's lab, he notices more leaking pipes like the one he saw in the forest the previous night. When John goes into the main lab, the lights come on and an alarm starts ringing, blinding and deafening him. He stumbles to the door as the lights go off and discovers that his pass card doesn't work. John goes to the animal cages and discovers that something has broken out of one of them. A creature growls at him from the darkness and John takes refuge in the cage, locking the door behind him. He calls Sherlock, who tells him that he's on his way and asks him to describe what he's seeing. John tells him that he's seeing the same thing that Sherlock described, and then warns that something is approaching his cage. It's Sherlock, who lets him out and turns on the lights. There's no sign of the Hound in the lab.
John wonders what's going on and Sherlock tells him that they're all under the influence of a drug. He goes to see Stapleton, who is working on a rabbit. Sherlock turns off the light, revealing that the rabbit glows in the dark, and tells her that they're investigating a murder. He asks to use her microscope and Stapleton agrees, and Sherlock uses it to analyze sugar samples. Meanwhile, Stapleton tells John that her daughter accidentally received a rabbit from the lab, but has no regrets about her work.
Once he's done analyzing the sugar samples, Sherlock throws them across the room and tells the others that there's no sign of a drug. He explains that he, John, and Henry all had the same food except for the coffee, since John takes his without sugar. Since John didn't see the Hound until after he drunk the morning coffee at the pub that Sherlock gave him with Henry's sugar, Sherlock was sure that his friend would see the Hound. He orders John and Stapleton out so he can concentrate and review everything he's memorized about the case. Dozens of connections between Liberty and In flash through his mind, and Sherlock finally connects Liberty, Indiana, and HOUND.
That night, Henry runs through the moors with the Hound in hot pursuit. He has a gun, turns, and shoots at the beast...
... and realizes that he's at home, shooting at Louise. She cowers in the corner as he runs away, terrified.
Sherlock goes to the base's computer center and accesses the files on Project HOUND. He explains to John that it was an experiment at a CIA facility in Liberty, Indiana, that he read about some years. Only Barrymore has the password for the files and Sherlock easily deduces what it is by examining the major's office. The file explains that the CIA was working on a drug that put the victim in a highly suggestible state, and they planned to use it on enemy armies. There is a file of the five scientists involved and Sherlock points out that the first letters of their last names spell HOUND. Each of them is wearing a team shirt with HOUND and Liberty, IN on it. The CIA shut down the project in 1986 because the drug drove the victims into homicidal fury. Sherlock concludes that someone has restarted the project and points out that one of the scientists in the photo is a young Dr. Robert Frankland.
Sherlock calls Falkland using the cell phone number he had early. Meanwhile, Louise calls John and tells him about Henry's delusional state. Sherlock hears them talking and realizes that Henry will go back to Dewar's Hollow. He calls Lestrade and tells the officer to meet them there.
Henry goes to the hollow, begging his dead father for forgiveness, and then puts his gun barrel in his mouth. Sherlock and John arrive and Sherlock tells Henry that someone has been guiding his memories. He tells Henry to remember and the young man concentrates, He finally remembers that a man wearing a gas mask with reddish eyes attacked his father. The killer was wearing the CIA HOUND shirt, which is what Henry saw and remembered in a distorted fashion. Sherlock explains that Henry buried the memories due to the trauma, but when he started to remember, the killer tried to drive him insane.
As Lestrade arrives, a relieved Henry hands his gun over. Sherlock tells Henry that they both saw an ordinary dog, but they were drugged and saw it as a demon Hound. Everyone hears a growling noise and looks up to see the Hound on the edge of the hollow. As it comes down, John points out that Lestrade can see it but he couldn't have been drugged. Sherlock turns and sees the killer in the gas mask approaching them. He advances on the figure and rips off the gas mask, and hallucinates Moriarty's face. Concentrating, Sherlock realizes that the gas is in the fog and that the killer is Frankland.
Panicking, Frankland yells at them to shoot the Hound. John and Lestrade fire and bring it down, and Sherlock shows Henry that it's just an ordinary dog. Furious, Henry attacks Frankland, asking why he didn't kill him. Sherlock explains that a dead man's story would have drawn attention, so Frankland set out to discredit Henry. Using pressure-triggered chemical mines, Frankland arranged it so that they would release the gas whenever Henry visited the Hollow. Sherlock thanks Henry for the interesting case and John points out that his timing might not be the best.
When the dying dog tries to move, Frankland takes advantage of the distraction to try and escape. He ends up running into the minefield. As Sherlock and the others close in on him, Frankland steps on a mine and realizes that there's no escape. Rather than let them capture him, he deliberately removes his foot from the mine and dies in the resulting explosion.
The next day, Sherlock joins John at the pub. He has deduced that Gary and Bill couldn't bring themselves to kill the dog. He doesn't understand why and John explains that they felt sentimental. Sherlock tells him that he was exposed to the gas via the leaking pipes in the lab, not the sugar. However, John realizes that Sherlock deliberately gave him the sugar in his coffee to see how the drug would affect him. He then sent him to the lab and locked him in to see how he would react when he played growling animal sounds over the intercom. Sherlock admits that he was wrong about the sugar but assures John that it won't happen again, and then goes to talk to Gary about a dog.
In a hidden facility, Mycroft tells his assistant to release their prisoner... Moriarty The assistant looks around the prisoner's cell, where the man has covered the walls with one word: "Sherlock."