Cooper is woken early by the sound of a raucous party in the Great Northern Hotel and makes a note for Diane to send him some earplugs by mail. The next morning, Cooper enters the dining room as the singing continues and the waitress tells him the men are business junkets from Iceland. Audrey talks to Cooper and offers to help him with his case, but he tells her to stay out of it and go to school. He leaves to meet Harry, while Jerry meets with Ben to discuss the new Icelandic investors in their property developments. Leland arrives, disoriented and wishing to return to work, but the Hornes send him home.
Cooper and Harry, along with other officers and Dr. Hayward, conduct a thorough search of Jacques Renault's apartment. Harry reports that no one has seen Jacques for two days and that it looks like Bernie has jumped bail. Dr. Hayward meanwhile reports that the blood on Leo's bloodied shirt is the wrong type to be Laura's, but it might be Jacques'. Cooper meanwhile manages to find a copy of the Flesh World, a contact ad magazine that Jacques had stashed away. It turns out that Jacques was managing correspondence for several of the magazine's advertisers, though one of the advertisers, in particular, catches the eye of the investigators: Laura. Her photograph is in front of red velvet drapes (not unlike the ones in Cooper's dream), which Cooper notices are much like those of a cabin in a photograph Jacques has in his apartment. Cooper tells Harry and Dr. Hayward to pack up, as they are going on an expedition into the woods to find the said cabin.
Shelly is having breakfast with Bobby; the two roleplay the idea of shooting Leo, while they toy with Shelly's pistol. When Andy arrives to inquire about Leo, Bobby hides and Shelly attempts to make Leo seem deeply involved in Laura's death and Jacques Renault's disappearance. Elsewhere, Ed and Norma meet to discuss their spouses. Hank has been released from prison, while the ever-volatile Nadine is increasingly becoming mentally unwell. Norma leaves, feeling that things are going nowhere, leaving Ed crestfallen. Meanwhile, Audrey is interviewed by Emory Battis, the manager of her father's department store, for a job. She blackmails Battis into giving her a position at the shop's perfume counter — where Laura and Ronette Pulaski worked before their abduction.
Maddy meets with James and Donna at the RR Diner. They discuss Laura's death; James and Donna believe Laura hid a diary at her home and want Maddy, who is now staying there, to look for it. They leave as Norma and Shelly arrive; Hank is seated at another table and pulls Norma aside to ask to start working in order to regain her trust.
Meanwhile, using the photograph from Renault's home and the clues from Cooper's dream, Cooper, Hawk, Harry, and Dr. Hayward search the woods for the cabin they believe to be the scene of the murder. The group comes across a cabin, but Cooper deduces that it is the wrong one. Regardless, the cabin's inhabitant, the Log Lady, steps outside to meet them and invites them inside for tea and cookies, saying that the owls will not able to see them there. The investigators accept her invitation. As they sit down at her table, the Log Lady gives them directions to Jacques' cabin that tells Cooper that her log has information for him. She says that the log apparently saw what happened in the other cabin on the night of Laura's murder: It saw two men and two girls and heard some screaming.
Following the Log Lady's directions. The investigators find Jacques' cabin with the red drapes. Cooper is quite intrigued as many of the details in the cabin match the clues the little man in the red suit told him in his dream. Searching the place, they find twine on the floor along with a bloodstain. A poker chip rolls out of the cuckoo clock: it is missing a piece of the same shape as was found in Laura's stomach. Harry also finds Waldo, the caged myna bird.
That same afternoon, Bobby attends family counseling with Dr. Jacoby, alongside his mother and father. Jacoby eventually asks Bobby's parents to step outside for a moment, so that he can talk to Bobby privately. Bobby is initially dismissive of Jacoby's attempt at analyzing him, but when Jacoby reveals that he knows about what happened between him and Laura the first time the two had sex, namely that Bobby cried afterward and Laura laughed at him for it, he breaks down and confesses that Laura had told him that she wanted to die. She told him that people were sick and rotten. Jacoby asks if Laura had a terrible secret, and says that she wanted to corrupt people. Bobby tearfully reveals that it is true for himself — Laura was pressured into dealing drugs so that she could use them herself.
At a party in the Great Northern to welcome the new investors, Ben Horne and Catherine secretly discuss their plan to burn the town's sawmill and buy the land cheaply, with Audrey spying on them. Leland begins sobbing hysterically and dancing erratically when a piece of music begins, and Catherine escorts him away while Ben meets with Josie Packard. Meanwhile, Shelly waits at home with her gun, as Leo arrives back making his preparations to start the fire at the mill. Hank attacks him beside his truck, threatening him not to compete. Leo, angry at having been cowed by Hank, returns home and lashes out at Shelly. Being fed up, she pulls the gun on him, but he doubts that she would pull the trigger. She actually takes a shot at him and hits him, causing him to scream like a wounded animal.
Cooper walks down the hallway to the sound of men singing and notices the door to his room is ajar. He enters with his gun drawn and finds Audrey naked in his bed, crying. She asks him to not make her leave.
Tropes:
- Amateur Sleuth: Donna, James, and Audrey all become these in their quest for justice.
- Bitch in Sheep's Clothing: Hank Jennings is very good at playing the part of the sincerely reformed criminal except when he's alone with other criminals like Leo.
- Blackmail: Audrey uses this to get a job at the perfume counter.
- Bunny-Ears Lawyer: Doctor Jacoby shows he actually is a talented psychiatrist despite his bizarre habits.
- The Dog Bites Back: Shelly's resistance against Leo climaxes with her shooting him in the chest.
- Driven to Suicide: Bobby has this interpretation of Laura's death.
- Driven to Villainy: Bobby is revealed to have been this due to Laura's influence. She wanted drugs and compelled him to become a dealer to do it. Also, Shelly Johnson's Frame-Up of her husband is brought about by her abuse at Leo's hands.
- Hidden Depths: Bobby Briggs shows a much softer side here than he often displays.
- I Need a Freaking Drink: When Leo comes home after being beaten up by Hank, he demands that Shelly get him a beer.
- Let Me Get This Straight...: "Now, let me get this straight. Your entire country is above the timberline?"
- Love Dodecahedron: The love triangle between Ed, Nadine, and Norma becomes this with the addition of Hank.
- The Mistress: Norma is not happy to be relegated to this role with Big Ed and effectively dumps him in this episode.
- Ms. Fanservice: Audrey, while fully covered, caused quite a few viewers to take notice of her when she attempted to seduce Agent Cooper.
- Red Herring: The bloody shirt possessed by Leo turns out to be this.
- The Worf Effect: Hank Jennings beats on and intimidates Leo to illustrate he's a better breed of criminal.
- Xanatos Gambit: Ben and Catherine's plan with the sawmill.
- You Wouldn't Shoot Me: Leo taunts Shelly that she wouldn't dare to pull the trigger... then is quickly proven wrong when she does just so.
