Chris warns that his company will have to cancel his deal with Jane's firm if Michael does not sign off on it. Sydney calls Matt from the mental hospital and pleads with him to investigate Kimberly. Jane and Matt visit the beach house, where she bonds with Michael while Matt snoops. He discovers that Kimberly owns several wigs, then rips off her wig during a confrontation at the hospital. Sydney accepts a plea bargain after a scummy staff member propositions her, and is released into Jane's custody. Kimberly vows revenge against Matt. Palmer and Brittany continue their plot against Jake. Palmer turns up on Amanda's doorstep. Billy and Alison break up after she learns that he took a job at D&D without consulting her. Jo receives a surprise visit from Reed's parents. She reluctantly admits that Reed is the father of her child, and is shocked when the Carters sue her for custody.

Sydney (claiming to be someone named Miranda) hangs around the beach house and attempts to seduce Michael. Michael regains his memory when he is nearly struck by a car in a restaurant parking lot, but doesn't immediately reveal this. Michael leaves Sydney in an embarrassing situation in Jane's bedroom, prompting a suggestive remark from Chris. Michael confronts Kimberly and dares her to kill him, but she decides that she loves him too much to finish him off. Billy and Alison bicker constantly at the office. Jo extends an olive branch to the Carters, only to have them laugh in her face. Palmer tells Amanda that he cannot go to prison before paying off some debts, as he fears his creditors will harm her. He tells her of a secret safe deposit box and convinces her to withdraw $500,000. Palmer kidnaps Jake on the boat at gunpoint, and explains that he and Brittany are going to take the money and flee to Mexico. Brittany double-crosses Palmer, shooting him in the back. Jake discovers that t

The trial to determine custody of Jo's baby begins. The Carters' attorney raises many doubts about the character of Jo's friends and neighbors, but Jo shines on the stand. Kimberly learns that she cannot have children because of injuries suffered in the car accident. Alison gets drunk at a client party and leaves with a hard-living music business scout named Zack Phillips. Bruce suffers a heart attack while dancing at the event, and Peter suggests that Amanda use the opportunity to seize control of the agency. Alison is unable to testify on Jo's behalf because she is stoned following a night of partying with Zack. The judge awards custody of the baby to the Carters. Matt questions his relationship with Jeffrey due to the illness, but the two decide to commit to each other.

Amanda is forced to confront her Scrooge-like behavior when Bruce appears to her in a dream and leads her in a version of The Christmas Carol. He encourages her to break free of the hold that Peter has over her. She visits Alison at the rehab center to apologize, and ensures that Bruce's children are financially secure. Terry becomes jealous after seeing Billy and Alison together, and admits his own feelings for her. Matt and Jo tell Peter that Kimberly has stolen her baby. Peter orders Michael to return the child to Jo. Kimberly goes ballistic and tries to throw herself in the ocean. After Michael saves her, she calls Mrs. Carter to tell her that her grandson is alive. Jeffrey breaks up with Matt because he needs time alone to cope with his illness. Jane convinces Syd to come home for the holidays.

Jake and Jo see the Carters arrive at the cabin with Emily and the baby. While Jake is calling the police, Jo disobeys his wishes and confronts the Carters. Mr. Carter shoots her in the back. Mrs. Carter sneaks into Jo's hospital room in the middle of the night, and threatens to kill Austin if she does not receive custody. The judge nullifies the previous custody arrangement, and agrees with Jo's suggestion that the baby be given up for adoption. Amanda is fired after testing positive for illegal drug use. Amanda and Matt discover that Peter prescribed pills for Amanda that contained the active ingredient in marijuana. Although Amanda has no proof, Peter believes her bluff. He knocks her out and plans to kill her on the operating table. Michael pulls the scalpel away and breaks Peter's nose. Michael and Amanda interrupt a D&D meeting where Caitlin is to be appointed president, and discredit her. Alison stops Terry from drinking after he loses a playoff game. He expresses his gratitude

Rikki commits acts of vandalism against Jo, Jane and Jake, who believe that Syd is responsible for the crimes. The isolated Sydney is forced to turn to Martin's cult for comfort. The visiting Meredith admits that she has never slept with a man because of the trauma of the childhood abuse. She tries to seduce Billy. The new chief-of-staff institutes mandatory psychological testing for the staff. Kimberly's test proves that she is extremely disturbed and highly dangerous. She has some men on the street assault test coordinator Matt, then changes her results while he is out of commission. John Rawlings, the police detective investigating the case, befriends Matt. Billy is concerned by Amanda's deteriorating health, and asks Michael to check her out. Amanda is horrified when tests reveal that she has Hodgkin's Disease.