A creature called The Hodag of Horror attacks Crystal Cove; meanwhile, Brad Chiles and Judy Reeves (Fred’s real parents) have suddenly appeared along with a dog whom Scooby has taken a fancy to.

A bear-like creature attacks Mayor Nettles and Sheriff Stone in the Crystal Cove woods near Destroido. They turn to the gang for help, explaining that the creature is called the Scarebear and has been stalking the grounds near the Destroido company for weeks. The gang finds out that the Destroido company has allowed toxic lithium to spill into the woods, which has resulted in the mutations of inhabitant plants and creatures including the Scarebear. Meanwhile, Mr. E and Professor Pericles have recruited Brad and Judy to help them find the gang's pieces of the Planispheric Disk, and have resorted to drastic measures to get the gang out of the way.

The Crystal Cove Haunted Historical Society performs reenactments of Crystal Cove history every year. During a rehearsal for this year's production, a Phantom Mummy resembling one of the props scares off the cast and crew members. Vincent Van Ghoul, called upon to take over production, finds the set destroyed and calls in Mystery Incorporated, who become the new cast and crew for the play. Meanwhile, Professor Pericles recruits Brad and Judy to steal the Planispheric Disk back from the gang.