Continuing towards Violet City, Ash, Misty and Brock have become lost in the middle of a deep forest. While his companions complain about the situation, Ash immediately tells them to follow him, saying their troubles will be over in no time. Despite his optimism, the gang still cannot find their way out of the forest. Misty then becomes annoyed with the fact that they will most likely be spending the night there.
Suddenly, eerie sounds echo from the trees. Then, the trees in front of them appear to gain menacing faces. Frightened beyond belief, they run to another part of the forest. Once again, however, they are confronted with the trees every way they turn. As they run away, a Hoothoot appears and uses Foresight, returning everything to normal.
Bewildered, the trio stops to catch their breath. From within the trees, Gary Oak emerges and tells them that everything they saw and heard was an illusion. He then commends Hoothoot on a job well done. After scanning Hoothoot with his Pokédex, Ash is mocked by Gary for being unprepared. Gary advises his rival to get a Hoothoot if he wishes to make it out of the forest. Confused, Misty asks Gary why he is still in the forest if he has a Hoothoot. Gary tells her that he has been busy catching Pokémon and lost track of time. Upon Gary's departure, Ash and the others search for a Hoothoot, but their efforts are in vain.
Out of nowhere, a Hoothoot appears at Misty's feet. Frightened, she shuffles away, but the Pokémon keeps following her. When Ash approaches it, Hoothoot attacks him and runs off. The trio give chase until they are lead to a bizarre rock formation. Brock suggests that it may be another illusion. The trio then continues chasing Hoothoot. Just as it appears Hoothoot will get away, Ash instructs Pikachu to use its ThunderShock. Before Pikachu attacks, Hoothoot turns around and attacks Ash by Pecking at his head. It then stops, looks up, and hops to the side of a very old woman. Brock, convinced that it is an illusion, walks up to it and tells Ash that something that ugly couldn't be real.
Angered, the woman responds to Ash and Brock's discussion, thoroughly scaring them. She assures the group that she is, in fact, real, and introduces herself as Hagatha. She then tells the trio they will need her help if they want to get out of the forest safely. Back at her house, Hagatha explains that she rents out Hoothoot to people traveling through the forest, as they have the ability to see past the ghostly illusions. Unfortunately, she only has one left, and it has never guided a single traveler safely through the forest. Not wanting to wait until the following morning, Ash picks up Hoothoot, saying all it needs is a good Trainer like himself. Once again, he is attacked by Hoothoot, who jumps into Misty's lap. Hagatha explains that since she was the one who trained it, this Hoothoot only gets along with pretty girls. Ash comments that there aren't any pretty girls around, causing him to be glared at by a furious Hagatha and Misty.
Elsewhere, Team Rocket are having their own problems navigating the forest. Despite their usage of a map, they seem to be unable to find their way. As Ash and the others continue with Hoothoot leading the way, Team Rocket decides to steal Pikachu.
As it leads the trio back to where the illusions first began, Hoothoot starts to tremble as blue fireballs begin to appear around Ash and the others. Ash asks Hoothoot to help, but it doesn't listen. However, when Misty asks, it attempts to use Foresight, but to no avail. Ash then tells Hoothoot to try again, but once more, he is ignored. Misty pleads with the Flying and Normal-type to try for her, and it tries again. This time, the fireballs combine to create a flaming ghoul. Terrified, Hoothoot runs off, followed shortly by Ash, Misty and Brock. Team Rocket, who cannot see the fireballs, think the trio have lost their minds.
Upon reaching safety, Ash gives Hoothoot a serious talk about being a Pokémon and not giving up. Misty, feeling sorry for Hoothoot, pleads with it to try again for her the next time. Unknown to the trio, a rope has made its way around Pikachu, and the Electric-type is being lifted into the trees. Ash grabs a hold of Pikachu, causing both to be pulled up. Team Rocket appear, and after announcing their arrive, they slam Ash into a tree. However, their escape plan fails, and Pikachu falls back into Ash's arms. The trio sends out Arbok and Victreebel to attack, while Ash calls on Bulbasaur.
However, before Bulbasaur can do anything, Hoothoot starts to shake just as before. Suddenly, a Dragonite appears, and Team Rocket gives chase. Just like earlier, Ash and the others cannot see anything, and are confused by Team Rocket's behavior. Before they can find out what's happening, Ash suddenly appears as multiple copies of himself. Pikachu, who is confused, responds to Ash by shocking all of them until the real one gets shaken up.
Afterward, a number of different Bug Pokémon begin attacking Misty. Hoothoot runs away, but Ash stops it and convinces Hoothoot to help Misty. As Hoothoot uses its moves, the illusions disappear and a number of Haunter and Gengar are revealed. Bulbasaur uses Vine Whip and Pikachu uses Thunderbolt to frighten away the Ghost Pokémon. Eventually, the trio reach the edge of the forest. However, it appears Hagatha is walking towards them. They wonder if they are still lost, until the woman yells that she is actually Hagatha's twin sister, Nagatha. Upon returning Hoothoot, Ash and the others depart the forest, and head back towards Violet City.
Meanwhile, Team Rocket appear to be on a beach, soaking up the sun's rays. What they don't realize is that it is all an illusion, and they are just back in the forest, surrounded by the Ghost Pokémon.