Ash, Misty, and Brock walk the streets of a new city. A woman suddenly rushes and hugs Ash, thinking that she's found her missing son, Arnold. Ash explains that his name is Ash from Pallet, and the woman apologizes, saying that Ash looked a lot like Arnold.
The woman's son Arnold just disappeared, and has been missing for three days. They notice some posters on a nearby building. A lot of children in the town have disappeared mysteriously. Officer Jenny arrives to put up another poster of a missing child. Brock quickly introduces himself. Ash realizes how worried the woman looking for her lost child is, so he decides he'll help out as well.
Officer Jenny explains that all the missing children disappeared exactly three days ago. The kids seem to have nothing in common, so they decide to ask around at the Pokémon Center. Brock and Jenny ask the kids there, while Ash and Misty talk to Nurse Joy. She explains that all the Pokémon at the Center are behaving strangely. They all seem to have lost their liveliness. Joy says that it started about three days ago. Brock notes that it was around that time that the children started disappearing. One of Officer Jenny's devices starts to make noise. She pulls out a sleep wave detector and explains that there are sleep waves present. They follow the sleep waves. Meanwhile, Team Rocket has a similar device and find out that the sleep waves are emanating from the town. Their plan is to find the source of the sleep waves, then use it to knock out the Boss so they can take a break. Even complete failure super villains need a vacation every once in awhile. Ash, Misty, Brock, and Jenny trace the sleep waves to a skyscraper. They travel up an elevator to the roof level, where the sleep waves are strongest. They find a mansion on the roof. Ash and Brock bust in, to find a bunch of rich-looking people, and a Drowzee and Hypno.
Jenny explains about the sleep waves. One of the gentlemen explain that Hypno might have been emitting them. Their Drowzee evolved into a Hypno three days ago, when all the children started to vanish and the Pokémon at the center lost their energy. The people there are members of the Pokémon Lovers Club. They've been using Hypno as a sleep aid to get to sleep. Hypno's hypnotic powers were only meant to be used on other Pokémon, but since the wavelength was changed to affect humans, it's creating a side effect for the Pokémon in the Center. The modified wavelength is also affecting the kids in the city. Misty checks it out for herself. Hypno uses its powers on Misty, and Misty starts acting funny, clapping her hands and saying "Seel" over and over. Misty runs outside. Ash, Brock, Jenny, and the leader of the Pokémon Lovers Club quickly follow. They chase Misty to a park in the middle of the city, where a lake is. They are astonished -- all the missing kids are there, all acting like Pokémon! Officer Jenny tries to wake them up, but it doesn't work. The club leader suggests using Drowzee to cure them. Since Drowzee emits dream wavelengths, it might counteract Hypno's wavelengths. They return to the Pokémon Lovers Club with Misty and have Drowzee use its sleep waves on Misty. Misty falls asleep, and with a clap of Drowzee's hands, Misty awakens, unaware that she had turned into a Seel temporarily. They take Drowzee and leave the mansion, but Team Rocket shows up on hang gliders and does their motto.
Jessie pulls out a mirror and dares Hypno to hypnotize it. Hypno starts to hypnotize the mirror (which bounces the hypnosis waves back to Hypno) but Ash throws a flowerpot at the mirror, shattering it. Jessie gets angry, and they pull out whips and whip Drowzee and Hypno, binding them. Misty calls out Staryu and Staryu breaks through the whips, releasing Drowzee and Hypno. Ash calls Pidgeotto, who uses a gust attack, sending Team Rocket into the stratosphere. They return to the park, and Drowzee cures the children. They all run home. Pikachu wakes up as well. They go back to the Pokémon Center, and cure the Pokémon there. However, the Psyduck is still holding its head. Brock says that caring for Pokémon is his ambition.
Psyduck follows Brock as the group leaves. Brock suddenly decides that he doesn't want Psyduck. It's a water Pokémon, so he suggests that Misty take it, but Misty doesn't want such a boring Pokémon. Ash looks in his Pokédex. Dexter explains that Psyduck constantly suffers from a headache. Misty gets upset, trips, and falls down. One of her Pokéballs rolls down to Psyduck. Psyduck taps it, and the Pokéball opens up and captures Psyduck inside. That is how Misty gets stuck with Psyduck