A narrator (voiced by Martin Freeman) opens a book on the history of the midwest and introduces the story of the Sioux Falls massacre, saying it is best to focus on Ed and Peggy, the butcher and beautician at the crime's center.
The convenience store clerk is in his shop when he spots Hanzee out the window making his escape from the cabin. As he moves to call the authorities, Hanzee shoots him dead through the window. Hanzee grabs hydrogen peroxide and super glue off the shelf and treats the wound from when Peggy stabbed him with the scissors. The narrator explains that not much is known about "Ohanzee Dent" -- they have no birth certificate or family information.
Back at the cabin, Peggy and Ed are detained by law enforcement who question them about what happened. They explain what happened with Dodd. Ed confesses "in the spirit of full disclosure" that his plan to trade Dodd worked and that he set a meeting with Mike Milligan at the Motor Inn. Lou insists that they need to get Peggy and Ed into custody right away before Milligan gets to town.
Outside, the various officers argue about who is going to take in Ed and Peggy. One of the local officers mentions that their station is not necessarily safe, since there is corruption there (Kansas City money). Captain Cheney pulls rank and convinces everyone that they should send Ed in to meet with Milligan wearing a wire. Lou refuses this idea, but is overridden.
Lou tries to warn Peggy and Ed not to take the deal, but Peggy scoffs at him, asking what he cares and blaming half of the mess they're in on Lou. Cheney threatens Lou, telling him to leave his territory now that he has tried to intervene. Hank opts to stay behind, so that there is one grown-up in town when everything goes down.
Cheney makes the offer to Peggy and Ed for Ed to go into the meeting wearing a wire. Ed agrees, but says he wants the deal (getting them out of the death penalty in exchange for wearing the wire) in writing.
Mike Milligan, at the border of South Dakota and Minnesota, calls Kansas City. He lies to them, saying that the Undertaker (sent to kill Mike) never showed up (pinning it on the Gerhardts) and also mentioning that he has made a deal to retrieve Dodd to put an end to the Gerhardts' resistance.
Back at Lou's house, Noreen looks after Molly. Molly goes into the kitchen to show Betsy a drawing and finds her collapsed on the ground, with a glass shattered near her. Lou tries to place a call home from the gas station, but the phone rings and rings, no one there to answer it.
As the line is ringing, Lou spots the shattered gas station window. He enters the convenience store, gun drawn, and spots the dead store clerk. He enters the restroom and sees the bloody paper towels and empty bottle of peroxide where Hanzee left it. Lou notices the "We are not alone" bumper sticker on the store's wall.
Lou waits for a local officer to arrive. The officer refuses to take Lou's concerns about the crime seriously and says he is only there to escort him out of state, on Captain Cheney's orders. Lou, flabbergasted at the stupidity, doesn't put up a fight.
Lou calls Hank, Schmidt, and the local officer Gibson as he is driving out of state and they are driving to the Motor Inn for the sting. He reports to them that Hanzee is driving a red pick-up and that he shot and killed the convenience store clerk before stealing the man's car. Gibson patronizes Lou, telling him to step down and let the Dakota officers handle it.
Schmidt and the men set Peggy and Ed up at the Motor Inn as Hanzee watches them through the sights of his gun from a nearby optometrist's roof. Meanwhile Gibson lectures Hank about Lou having been out of line, likening their situation to the situation in war where a general makes all the decisions. Hank counters with his own story of a lieutenant who defied Eisenhower's orders and saved all of their lives. Gibson brushes over that story, saying that he is taking the fight to the enemy tomorrow and that Hank can stay or go as he pleases.
Back at the Gerhardt farm, Floyd takes Hanzee's call. Hanzee tells Floyd that Dodd is alive and being held by the Kansas City men, Mike Milligan specifically. The narrator reports that historians have long debated when Hanzee made the decision to betray all of the rest of the Gerhardts, pointing out that it may have happened as he observed the plaque commemorating the hanged 22 Sioux, when Bear asked him to be straight with him, or even earlier when he was still a child. Hanzee tries to tell Floyd to just send Bear and a dozen of their men to bring Dodd home, but Floyd insists on going herself, since she's already sent men on three separate missions and they'd all failed.
Peggy and Ed stay in the room with Schmidt. Ed tries to voice his concern over whether they are doing the right thing, while Schmidt continues to ignore him and watch TV instead. Peggy calls Ed over and tries to quietly suggest that they escape in the night when Schmidt is sleeping. Ed refuses and Schmidt tells them to quit congregating. Peggy tries to loosen Schmidt up by conversing and flirting with him, which begins to succeed.
Lou drives across the state line, arriving back in Minnesota. The South Dakota officer leaves him there and turns back around. He gets a transmission on his radio, informing him that Constance Heck was found dead in her room at the Sioux Falls Motor Inn. Affected by this news and the rising body count, Lou turns around and drives back into South Dakota.
Lou arrives at the crime scene of Constance's murder and sees the signs of a struggle.
Hank goes to check in on Peggy and Ed, before Schmidt (feeling that Hank is doubting his aptitude) shuts the door in his face.
Gibson lectures his two officers about the importance of this bust and what they need to do. He tells them that from now on they are radio silent, and has the officer switch off the radio.
Hank and Peggy are both awake as everyone else in the hotel rooms sleeps. Lou spots the Gerhardts driving towards the Motor Inn and tries to radio over to warn everyone as he is driving over to the inn, but they don't receive the transmission because they have turned the radio off.
Bear instructs Floyd to remain by the car when they arrive at the hotel, telling her that Hanzee will stay behind with her.
As the South Dakota officers sit around playing poker and discussing the best piss they ever took, Bear, Floyd, Hanzee, and many of the Gerhardt men arrive at the Motor Inn and prepare to ambush everyone. Floyd remains behind with Hanzee, watching.
The Gerhardt men kill a potential witness sitting outside of the hotel. Hank suddenly sits up and says "screw this." As one of the officers is lecturing the other on why it was a bad idea to pee in a pool and Hank quickly dresses, the Gerhardt men surround the hotel rooms and ambush everyone. The Gerhardt men take out most of the local officers. Hank manages to shoot a few of the men and takes cover. Ben Schmidt takes out the Gerhardt men who overtake the room he is in with Peggy and Ed. Peggy knocks Schmidt out in the midst of the frenzy.
After Bear takes out the roomful of officers, he searches for Dodd, with his weapon raised, clearly intending to kill him when found. Someone shouts to Floyd that there are police officers there, not the Kansas City men. Floyd realizes that Hanzee betrayed them, and he stabs her, killing her. Hanzee shoots everyone, the Gerhardt men and the officers. Hank is shot in the stomach by Hanzee.
Bear sees this and runs towards his mother. Lou shoots Bear, but Bear turns and continues to attack Lou, nearly killing him. Suddenly, a flying saucer arrives, hovering above the scene. While Bear is distracted by it, Lou shoots Bear through the head, killing him finally.
Peggy and Ed narrowly escape, with Hanzee in close pursuit. Lou finds Hank badly wounded. Hank professes regret for not going home with Lou. Mike Milligan and Gale Kitchen arrive and express mild surprise at seeing the scene, before turning tail and leaving. Lou runs off in pursuit of Hanzee and the Blomquists as officers swarm the scene, leaving Hank behind at Hank's request.