The gang is camping when they spot glowing red eyes staring at them from the woods. Investigating, they find the tracks of a two-legged wolf, which they trace back to an old cemetary and the open grave of Silas Long, "half man and half wolf." Another set of tracks then leads them an abandoned mill. Inside, they split up and look around for clues. Shaggy and Scooby find nothing but manage to keep narrowly missing the werewolf, who is stalking them. Freddy, Daphne and Velma find a map of the area--and the werewolf!A chase ensues that ends with Shaggy and Scooby in a pile of white wool, which scares Freddy and the girls into hiding inside barrels with rubber tubes sticking out the top. Meeting up again with Shaggy and Scooby, the gang go outside where they find a narrow-gauge railroad carrying carts from the mill to a freighter docked by the river. Freddy and the girls follow the rail track back into the mill, where they are locked inside by the werewolf. Shaggy and Scooby follow the track to the freighter. Going aboard, they run into the werewolf, give him a haircut, and escape down a tunnel that takes them into the room where Freddy and the girls are locked up. From inside, they watch the werewolf pull a baa-ing barrel out of the water and decide to spring a trap.
Shaggy and Scooby hide inside a barrel and launch themselves onto the river. The plan: Shaggy and Scooby will distract the werewolf when it takes them out of the water, and Freddy will catch the werewolf with a crane and hook. But Daphne gets caught on the hook instead; Shaggy and Scooby escape in their barrel onto the river, but the werewolf chases them in a canoe. The chase ends with all three going over a waterfall. The rest of the gang catches Shaggy and Scooby in a net, but the werewolf is caught on a rock and calls for help. They rescue him. He is unmasked as one of a gang of sheep rustlers who have been using the mill as a hideout from which to smuggle the stolen sheep over the river.