Young Henry runs through the woods, the screams of his father being ripped apart echoing in his head. He finally finds an old woman on the moors, walking her dog, and she asks what is wrong. When the dog moves toward Young Henry he screams.
In the present, Henry Knight is standing on the moors and starts to move off, startled.
Sherlock enters 221B Baker Street, covered in blood and holding a harpoon. After he cleans up, Sherlock begins pacing nervously, demanding that John find him some cigarettes. After John warns him that no one in a two-mile-radius would sell him any, Sherlock tears the place up looking for his cigarettes. Mrs. Hudson claims to have no idea where they are, and storms out when Sherlock points out that the diner owner she’s seeing has a wife. John tells his friend to go after her and apologize, but Sherlock complains that he’s bored now that he has no case and needs some kind of diversion. The only case he has on the blog is a request to find a missing rabbit that glows in the dark. The doorbell rings and they realize they have a client.
Henry comes in and shows them a recording of a broadcast about Dartmoor, the Grimpen Moor, and a biochemical weapons research base. It is rumored to have been used for the “Baskerville Experiments.” One of the interviewees is Henry, who talks about how he saw a savage hound on the moor when he was 9. Sherlock cuts it off and asks Henry what he saw, and he talks about how his father took him there for walks after Henry’s mother died. At Dewar’s Hollow, a local landmark named after the Devil, Henry saw his father attacked and killed by a huge black hound with glowing red eyes. They found Young Henry the next morning, wandering on the moor, and his father’s body was never found. Sherlock jokingly suggests that a genetic mutation was responsible, but Henry tells him that his father was always talking about the monsters they were breeding at the Baskerville base.
John asks why he came to them after 20 years, and Sherlock deduces that something happened the previous night. He explains all of the signs, including the fact that Henry hasn’t smoked yet that day, and invites him to do so. As Henry lights up, Sherlock lurks over him and inhales the smoke, while John suggests that Henry might have invented the trauma of a hound attacking his father. Henry notes that his therapist, Dr. Louise Mortimer, has said the same thing and suggested that he go back to Dartmoor to face his fears. He tells them that he saw the paw prints on the spot where his father was torn apart, and Sherlock dismisses it as a boring case, figuring they were paw prints and probably nothing. As he walks off, Henry tells him that they were the footprints of a gigantic hound.
Sherlock is intrigued by the exact words that Henry used and has him repeat them. Upon hearing them again, Sherlock agrees to take the case. When John wonders what changed his mind, Sherlock doesn’t say but tells Henry that he’s busy in London so he’s going to send John in his stead. John points out that he doesn’t have any cases and Sherlock says that he’ll be investigating the missing rabbit. However, John gives him his cigarettes and Sherlock announces that the case is so intriguing that he’ll go with John and follow Henry to Dartmoor. They soon depart, pausing only to watch Mrs. Hudson argue with the diner owner that she’s been dating.
Sherlock and John drive to Dartmoor and identify the local landmarks, including Grimpen Village and the Baskerville military base, the latter protected by a minefield. When the two men arrive in the village to take a room, they discover that the locals are doing business with the tourists, promoting the Hound.
Henry is meeting with Dr. Mortimer and relating his dreams of the Hound. He also manages to recall the words “Liberty in” from his dreams but Mortimer claims to have no idea what it means.
John collects the key to their room from the pub owner, Gary, and notices an invoice for meat supplies on the spindle. While Sherlock looks around the pub, John secretly takes the invoice and then asks about the skull and crossbones on the map of the Moor. Gary explains that it indicates the Grimpen Minefield, and admits that he’s thankful for the story about Gary and his demon hound. The owner directs them to Fletcher, the tour guide who claims to have seen the Hound. Meanwhile, his bartender Billy talks about his nervousness, given the presence of the Hound as well as an escaped prisoner.
Sherlock goes out to talk to Fletcher and asks if he’s seen the Hound. Fletcher avoids answering his questions, but when John comes out, Sherlock tells him that they had a bet that Fletcher couldn’t prove he’d seen the Hound. John plays along and Fletcher tells them that he saw it a month ago and shows them a camera phone picture. Sherlock dismisses it as unconvincing and Fletcher insists that it escaped from Baskerville. He finally tells them about a friend with the MoD that showed up late, white as a sheet, and claimed he had seen something. After that he was sent to a secret government base, possibly Baskerville, and when he got out he had seen giant mutated animals. Fletcher finishes his story by showing Sherlock a plaster cast of the Hound’s paw print.
Next, Sherlock and John drive to Baskerville. Sherlock gets them in using an ID he stole from Mycroft, much to John’s surprise. They figure they have 20 minutes until the military realizes something is wrong. Corporal Lyons of Security comes over to greet them, explaining that he was notified when the badge confirmed who they were. He explains that they don’t have inspections, and John bluffs his way through presenting his own Army ID. Lyons warns that Major Barrymore won’t be pleased that they are there, but gives in and provides a tour.
Lyons takes the two men in past security into a white sterile lab where numerous animals are kept in cages. Dr. Frankland comes over and chats with them briefly before departing. Sherlock notices a lift and Lyons says that it leads to the garbage bins. John asks Lyons what they’re doing there and he explains that they are doing all matter of research, but most of it weapons-based. He then takes them to see Dr. Stapleton, but she hesitates to tell them what she’s doing. When Sherlock makes a few veiled threats, Stapleton admits that she does genetic research. He finally recognizes her name and shows her the name of the missing rabbit, and asks why it had to die. Stapleton has no idea why they’re interested in her daughter’s rabbit and ask who they are. Sherlock realizes that their window of opportunity is over and heads out.
The security check finally raises a flag and the base security call Mycroft. He realizes who is responsible and calls Sherlock, who is heading into the elevator with John and Lyons. They find Frankland on the elevator and take it up, only to find Barrymore waiting for them. He is angry that he wasn’t told about the inspection and the two men try to bluff their way through, while Mycroft continues to send his brother text messages asking what he’s doing. Lyons gets an alert and sets off the alarms, and Barrymore prepares to arrest them. However, Frankland steps forward and identifies Sherlock as Mycroft. Barrymore shuts down the alarm but warns that it’s on Frankland’s head.
Frankland takes them out and explains that he realized they were connected to Henry. He’s well aware of Sherlock from his web site, and explains that he knows Henry primarily through his father, a good friend. Frankland gives Sherlock his cell number and offers any help that he can. Sherlock asks what he does at Baskerville and Frankland refuses to answer. He also refuses to discuss Stapleton and Sherlock tells him that he’ll be in touch.
As John and Sherlock drive to Henry’s home, Sherlock explains that Dr. Stapleton experimented on her daughter’s rabbit, giving it a fluorescent gene. He wonders if she’s been working on something deadlier than a rabbit. Henry greets them at the house and ushers them in, and John is surprised to discover that their client is rich. They have tea and Henry tells them of the two words he saw, “liberty in.” They mean nothing to Sherlock, who tells them their plan: they’ll take Henry out onto the moor at night and see if anything attacks him. Neither Henry nor John is thrilled with his plan.
That night, the three men cross the moor to Dewar’s Hollow. John hears something moving behind them and goes to investigate, and sees a light flashing at the top of the hill. He calls to Sherlock but discovers that he’s lost them in the woods. Realizing that the mysterious signaler is using Morse code, John takes down the letters, which spell UMQRA. The light goes out and John goes after his friend.
As they approach the hollow, Sherlock mentions that he met Henry’s friend, Dr. Frankland. Henry dismisses him as a worrier and notes that Frankland has been kind to him since he came back. When Sherlock wonders how they got along given that Henry’s father distrusted Baskerville, Henry explains that the two friends agreed to never talk about work.
John walks through the woods and finds a metal pipe dripping water. Something moves behind him and an unearthly howl echoes through the forest.
Sherlock and Henry climb down into the hollow and hear something above. For a brief second Sherlock catches a glimpse of some animal on the edge. Sherlock goes up as John arrives, and he insists that he didn’t see anything, much to Henry’s surprise. Back at Henry’s estate, Henry insists to John that Sherlock must have seen something and wonders why he would lie. John has him sit down and prepares to give him a sedative, but Henry is satisfied that he’s not insane and that Sherlock saw the same thing that he did.
John goes back to the pub where Sherlock is seated at the fireplace. He asks his friend what UMQRA might mean, but realizes that Sherlock is deeply disturbed. Sherlock finally admits that he saw the Hound and that he can’t account for it. He’s surprised and shocked that he’s feeling fear but shouts that there’s nothing wrong with him. Sherlock analyzes a nearby son and mother, deducing everything he can from them to prove that his intellect is unshaken. He snaps at John, saying he doesn’t have friends, and John walks outside. He sees the same light flashing out on the moor and goes out after it.
Henry wakes up and has another flash of the two words.
John follows the flashing light and discovers that it’s the headlights of a car parked on the local Lover’s Lane. As he goes back to the pub, Sherlock sends him a text message saying that Dr. Templeton is at the pub. He asks if John will interview her. When John wonders why he should, Sherlock sends him a photo of the attractive doctor.
Unable to sleep, Henry watches the television. All of the outside lights come up and then go off after a few seconds. They come back on again and then go off, and an animal moves through the shadows, startling Henry. He goes to the patio window and the lights come up again and something slams into the glass. Henry jumps back in fear as the lights go out again and then collapses to the floor.
At the pub, John flirts with Dr. Templeton as they share a bottle of wine. He freely admits that he knows Henry and asks Templeton about her, but she insists she can’t talk about her patient. John persists, asking about Henry’s father and whether he was a conspiracy theorist who was fixated on Baskerville. Templeton doesn’t want to talk about Henry and John explains that he has a friend who has the same problem. Before the doctor can respond, Frankland comes over and asks about the investigation. He cheerfully explains that John works with Sherlock, a private detective. Realizing what John is up to, Templeton walks away in disgust.
The next morning, Sherlock goes to see Henry and offers to make him coffee. Henry asks why Sherlock lied about seeing the Hound, and Sherlock tells him that he took the case before Henry used the archaic term “hound.” Sherlock then walks outside past the nearby graveyard and notices John inside. He tries to talk to his friend about the case but John refuses to humor him. Sherlock tries to apologize for the previous night, explaining that he felt doubt for the first time. John tells him that he can investigate it if he wishes and walks away. Sherlock calls after him saying that he meant what he said and that he doesn’t have friends, but just one friend. John keeps walking but Sherlock suddenly congratulates him, saying that he’s given him an idea. He suggests that HOUND is an acronym, accounting for Henry’s use of the term.
As they return to the pub, John and Sherlock discover that Lestrade is there. He says that he’s on holiday but Sherlock realizes that Mycroft sent him. Lestrade insists that he doesn’t work for Mycroft, but John interrupts to ask him to check out Gary’s invoice for meat. The inspector agrees and meets with Gary and Billy, while Sherlock makes coffee with sugar for John to try and apologize. Gary finally admits that they found a wild dog and used it to bolster the legend and draw in the tourists. He explains that they kept the vicious dog in a mine. They finally took it to the vet to have it killed when they couldn’t control it. Disgusted, Lestrade walks away and John and Sherlock go after him. John catches up to him and points out that Sherlock is glad to have Lestrade there because he’s a familiar face. When Sherlock catches up to them, Lestrade admits that he has nothing to charge Gary with. Satisfied that he’s solved the case, Lestrade leaves. However, Sherlock insists that the Hound he saw was no ordinary beast, but a giant Hound with glowing skin and red eyes. He has a theory but needs to get back into Baskerville to confirm it... and calls Mycroft for help.
Sometimes later, Sherlock and John return to Baskerville. Sherlock tells John that he’ll have to search in the labs for the Hound while he talks to Baskerville, and that his friend should start with Stapleton’s. Barrymore is less than thrilled when Sherlock informs him that he’s been given unlimited access for 24 hours, but has no choice but to agree with the order. The major figures that Sherlock is a conspiracy nut and tells him that he won’t find anything.
At home, Henry crouches on the floor and holds a photo of his family. He has another flash and screams in shock.
John goes to the labs as the scientists shut down for the night. He uses the pass card to enter Stapleton’s lab and looks around, noting several leaking pipes. When he emerges, a bank of lights comes on and a siren starts blaring. Half-blinded, John makes his way to the door but discovers that the pass card doesn’t work. The lights and sound shut down and John hears someone moving around. He investigates the cages and discovers that something has broken out of one of them. Something growls in the darkness and John makes his way to another door. His pass card doesn’t work on that one and he’s unable to raise Sherlock on his cell phone. John finally takes refuge in one of the empty cages, locking the door behind him. Sherlock calls and John begs him to get him out. At his friend’s request, John tries to describe what is in the lab and he finally sees what he insists was the Hound.
Sherlock arrives seconds later, turns on the lights, lets John out, and has him describe what he saw. John repeats Sherlock’s earlier description of what he saw the previous night, and Sherlock explains that they’ve all been under the influence of a drug. They go to see Stapleton and find her experimenting with a rabbit. When she wonders why they are there, Sherlock says that it’s a matter of murder and turns off the lights. The rabbit, her daughter’s, glows in the dark and Stapleton asks what he wants. Sherlock asks to use her microscope and she agrees. While Sherlock analyzes sugar samples, Stapleton explains that there was a mix-up and her daughter accidentally got one of the fluorescent rabbits. She freely admits that she has been engaged in genetic experimentation and that there’s no limit on the size of the animals that she can tamper with.
Sherlock throws the samples away in disgust and admits that there’s no sign of the drug that he’s sure must be responsible. He tells John that the three of them have all had the same food except for coffee, since John takes his coffee without sugar. John only “saw” the Hound after he drank Sherlock’s sugar with the coffee from earlier, that he had taken from Henry’s kitchen. However, there’s no sign of a drug in the sugar. Sherlock tells Stapleton and John to leave so that he can concentrate and John leads the scientist out. Once they’re gone, Sherlock mentally reviews everything he’s seen, heard, and read since the case began. Finally he realizes the significance of Liberty, Indiana, and HOUND.
That night, Henry is running through the moors as the Hound chases after him. He tries to shoot at it...
... and wakes up at his house to discover that he’s holding a gun and fires a shot, narrowly missing Dr. Templeton. Shocked, he runs away.
Sherlock has Stapleton take him and John to the computer center and bring up the files on Project HOUND, an experiment at a CIA facility in Liberty, Indiana. The file is password-encrypted and only Barrymore has the key. Sherlock looks around the major’s office and his collection of books, deduces the password, and enters it. The computer brings up a series of files on a suggestibility drug, and the last names of the five principal scientists spell HOUND. The photo shows the five scientists, wearing HOUND t-shirts with Liberty, IN on them. The CIA wanted to use the drug to disorient the enemy but shut it down in 1986 because the drug drove the test subjects insane. Someone is carrying on the research now, and Sherlock realizes that one of the scientists is a young Dr. Falkland.
As Sherlock calls Falkland to arrange a meeting, Templeton calls John and tells him Henry has a gun and is suffering fits of paranoid dementia. Sherlock figures that Henry will head back to Dewar’s Hollow and calls to Lestrade to have him meet them there.
Henry staggers down into the hollow, apologizing to his dead father, and puts the gun into his mouth. As he prepares to pull the trigger, Sherlock and John arrive and try to stop him. Sherlock realizes that someone has been guiding Henry’s memories and tells him to remember what happened when he was 9. Henry concentrates and remembers a man in a gas mask attacking his father, a man who was wearing one of the HOUND t-shirts. Sherlock tells Henry that as a child he couldn’t handle the memories so rationalized it as something different. However, when Henry started to remember the truth, the killer tried to drive him out of his mind.
Lestrade arrives as Henry hands the gun over. When he points out that he and Sherlock both saw the Hound, Sherlock explains that it was an ordinary dog and their drugged minds saw it as a monster. A dog moves along the top edge of the hollow and John points out that Lestrade shouldn’t be drugged. As the Hound comes down into the hollow, Sherlock sees a man wearing a gas mask step into sight. He grabs the man and pulls off the mask, and sees the face of... Moriarty. Realizing that he’s been drugged, Sherlock deduces that the gas is in the fog. Concentrating, he can see that the newcomer is Frankland. The Hound comes at them and Frankland yells at them to shoot.
Lestrade and John open fire, killing the beast. Sherlock takes Henry to it and he realizes that it’s just an ordinary dog. Henry lunges at Frankland, throwing him to the ground, and wonders why he didn’t just kill him. Sherlock explains that Frankland needed to discredit him. He planted pressure-sensitive chemical mines in the area, dosing Henry every time that he came to the hollow. Sherlock is thrilled at how intriguing the case was. Henry realizes that his father was right and Frankland killed him.
The dying dog stirs, distracting the men long enough for Frankland to run off. He enters the minefield and steps on a mine. Refusing to let himself be captured, he lifts his foot and the mine explodes, killing him.
The next day at the pub, Sherlock joins John for breakfast. The detective has concluded that Gary and Bill couldn’t kill the dog, but has no idea why they would hesitate. John explains that they spared it out of sentiment. When he wonders how he was exposed, Sherlock says that the leaking pipes in the lab contained the gas. However, John realizes that Sherlock deliberately put the sugar in the coffee, locked him in the lab, and played pre-recorded animal growls to confirm his hypothesis. John isn’t happy but is satisfied after pointing out that Sherlock was wrong about his original hypothesis. After assuring his friend that the drug has no long-term effects, Sherlock goes over to talk to Gary about a dog.
In a hidden facility, Mycroft ells his underling to release a captive Moriarty. The underline then looks around the captive’s cell, which is covered with the word “Sherlock” scratched into the walls.