School is out and the familiar Scooby gang are looking to enjoy a long vacation. However, sightings of a Lake Monster cause them to band together once again to solve yet another mystery.
As summer vacation approaches, the group goes to see Thornton "Thorny" Blake V, Daphne's uncle, who has offered them summer jobs at his country club in Erie Point to help cover the costs of a previous mystery. The club's opening party is attacked by a frog monster, and they look into Elmer Uggins, the lighthouse keeper who is the only one with a photo of the lake monster. He shares with them the tale of the lake monster: Wanda Grubwort, a witch who drew her power from moonstones, forewarned the settlers of Erie Point not to enter her territory when they first arrived. Before she was tried for her crimes and executed by burning at the stake, she used her magic staff to turn a frog into a monster that attacked the villagers after they disregarded her warning.
Velma shows the group security footage of the lake monster encountering an enigmatic cloaked figure on the beach the following day. They try to examine the video to see the face of the figure, but Velma destroys the video when she spills green tea on the computer. Friction between Fred and Daphne, whose relationship has deteriorated as a result of their socializing, and Shaggy's feelings for Velma, which caused him to alienate Scooby, complicate the situation.
When they discover Velma unconscious on the beach the following morning, Shaggy observes warts on her hand, which she brushes off. Following their announcement of the most recent monster attack, Daphne claims to have noticed purple paint on the figure's cloak and recommends that they take a look at a boat they spotted en route to Erie Point. Velma accepts Shaggy's invitation to go on a date, and everything is going well until he lights candles with a match, frightening her. Shaggy drops a moonstone he intended to give Velma as a surprise when Scooby tries to ruin the date because he is upset that he ignored him. Fred and Daphne are locked in a room that is flooding as they go to see the boat, but they manage to get out.
Upon visiting the residence of Hilda Trowburg, a descendant of Wanda, the group recognizes the figure through the windows as Velma. But she attacks them and renders them unconscious, claiming she is not Velma. Trowburg informs them that Velma has been possessed by Wanda's spirit after they awaken, and they understand that their internal strife prevented them from seeing the warning signs of Velma's possession, such as the warts on her body, her love of moonstones and fear of fire, and the way she spilled tea to conceal her identity. They follow Velma to the underwater caverns at Trowburg's suggestion, where she turns three frogs into monsters that attack them.
Shaggy tries to reach Velma by singing her favorite song as the monsters encircle Fred and Daphne, and Velma escapes Wanda's control. When Wanda tries to take back her staff, Scooby shows up and destroys it, killing Wanda and restoring the monsters to their former state. After confessing to Velma and sharing a kiss, Shaggy and Velma decide they have no romantic feelings for one another and that they would be better off as friends. This enables Shaggy to make amends with Scooby. Daphne names the group Mystery Inc. after Thornton thanks them for saving his county club and says he will get them a lawyer so they will not have any more legal issues.
