While on their way to Violet City, Ash and his friends get lost in the middle of a deep forest. While the others complain about the situation, Ash tells them to follow him, saying their troubles will be over in no time. Despite his optimism, the group is still unable to get out of the forest and Misty becomes increasingly frustrated. As the night settles in, eerie sounds echo from the trees, which then appear to gain menacing faces. Frightened by this, the trio runs to another part of the forest. Once again, however, they are confronted with the same trees every way they turn. As they flee, a Hoothoot appears and uses Foresight, returning everything to normal.
Bewildered, the trio stops to catch their breath. Suddenly, Gary emerges from the trees 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 then 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 the time. After Gary departs, Ash and his friends 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 Owl Pokémon keeps following her. When Ash approaches it, Hoothoot attacks him and runs off. The trio gives chase until they are led to a bizarre stone structure, which Brock believes is another illusion. The trio then continues chasing Hoothoot. Just as it appears Hoothoot will get away, Ash instructs Pikachu to use Thunder Shock. Before Pikachu could attack, Hoothoot turns around and begins Pecking Ash's 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, assuring the group that she is real, and introduces herself as Hagatha. She then tells the trio that 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 illusions. Unfortunately, she only has one left, and it has never guided a single traveler safely through the forest before. Not wanting to wait until the following morning, Ash picks up Hoothoot, saying that all it needs is a good Trainer like himself. Once again, he is attacked by Hoothoot, who then jumps onto 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 is also lost in the forest. As Ash and his friends continue with Hoothoot leading the way, Team Rocket decides to steal Pikachu and begins to follow. As Hoothoot leads Ash and his friends back to where the illusions first began, it starts to tremble as blue will-o-wisps begin to appear around them. 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-type to try for her, and it tries again. This time, the will-o-wisps combine to create a flaming ghoul. Terrified, Hoothoot runs off, followed shortly by Ash and his friends. Team Rocket, who cannot see the fireballs, thinks the trio has lost their minds.
Upon reaching safety, Ash talks to Hoothoot about being a Pokémon and not giving up. Misty, feeling sorry for Hoothoot, pleads with it to try again for her next time. Unbeknownst to the trio, a rope makes its way around Pikachu, and the Electric-type is lifted into the trees. Ash grabs Pikachu, causing the both of them to be pulled up. Team Rocket appears, and after announcing their arrival, they slam Ash into a tree. Meowth locks Pikachu in a box, and the trio begins their escape on a wooden boat along a zip-line. However, after the rope breaks, Team Rocket falls to the ground and Pikachu lands in Ash's arms. Jessie and James send out Arbok and Victreebel, respectively, while Ash calls out Bulbasaur.
However, before Bulbasaur can do anything, Hoothoot starts to shake just as before. Suddenly, a Dragonite appears and Team Rocket gives chase, but Ash and the others cannot see it and are left confused by the trio's behavior. Just then, Ash and his friends find themselves surrounded by multiple copies of Ash. Pikachu, who is confused, responds to Ash by shocking all of them until the real one gets shaken up. Afterwards, a number of different Bug Pokémon begin attacking Misty. Hoothoot runs away, but Ash intervenes and convinces it to help Misty. After Hoothoot uses its moves, the illusions disappear and a number of Haunter and Gengar are revealed. The group quickly realizes that the Ghost Pokémon are behind the nightmarish illusions. Misty orders Hoothoot use Foresight again, and the Owl Pokémon follows suit. While the Ghost Pokémon are startled, Bulbasaur lands a Vine Whip and Pikachu uses Thunderbolt to frighten them away. Ash congratulates Hoothoot on overcoming its limit, but it responds by pecking him before returning to Misty's side.
The sun rises and the trio finds themselves back standing at a stone structure like the one seen earlier. When they see Hagatha walking towards them, they wonder if they are still lost. She yells that she is actually Hagatha's twin sister Nagatha. She then takes them to her house, where they return Hoothoot. Hagatha calls through the videophone, and is relieved to see Ash's group safe. Ash and his friends depart the forest, and continue onward towards Violet City.
Meanwhile, Team Rocket is on an illusory beach, soaking up the sun's rays and failing to realize that it is all an illusion. In reality, they are still in the forest, surrounded by the Ghost Pokémon.