"Phases" begins with Willow's increasing frustration that Oz shows no sign of wanting to get serious - not to mention physical - with her. Cordelia is frustrated with Xander because he keeps talking about Willow, even while making out in Sunnydale's lover's lane under a beautiful full moon. They are attacked by a werewolf that rips a hole in the car's roof. Giles points out that there have been quite a number of other attacks, though so far only animals have been killed. During high school gym class, we learn that at least two students have been bitten lately: Oz by a cousin who doesn't like to be tickled, and school macho Larry by a dog.
After some research, Giles finds out that a werewolf is a wolf for three nights - the coming night would be the second. Since the werewolf is human the rest of the month, it would be wrong to kill him. This, however, is not what werewolf hunter Cain thinks, whom Buffy and Giles meet while looking for the animal in a part of the woods where Xander and Cordelia were making out: Cain is out for his twelfth pelt. Though the two groups do not get along, mainly because Cain is a rampant male chauvinist, Giles and Buffy do learn that the werewolf will be attracted by "sexual heat" to places where teenagers hang out.
Buffy and Giles rush to the Bronze, where Cordelia and Willow are busy complaining to each other about their men when the werewolf crashes the party. Buffy tries to catch it with a chain but fails. Cain joins them and points out that it will be Buffy's fault if the werewolf kills anybody. A body does turn up the next morning: Theresa, one of the students that Larry was tormenting. Buffy is not the only one to have feelings of guilt. Oz wakes up in the forest, butt naked and confused after changing back from his wolf state before the viewers' eyes. Recalling the bite he got, he calls his Aunt Maureen, and bluntly asks if his cousin is a werewolf. The answer is yes.
Xander figures that Larry is the most obvious suspect because of the dog bite, aggressiveness and "excessive back hair". When he confronts Larry alone in the gym locker room, it turns out that he really is hiding something - his homosexuality. Xander unwittingly helps Larry out of the closet, who is left with the impression that Xander is gay, too. Back in the library, Buffy suggests to Willow that she might have to make the first move if she wants to speed things up with Oz.
Buffy realizes that the reports of Theresa's body didn't mention any mauling. She and Xander get to the funeral home in time to watch her rise as a vampire. Theresa passes along greetings from Angelus before Xander stakes her. Buffy is left shaken by this and Xander comforts her, and it looks for a moment the two might kiss before they both regain control.
Cain busies himself casting silver bullets in preparation for the hunt. Willow takes Buffy's advice and visits Oz right before sundown. Oz is about to chain himself up, but lets Willow in the house. Her rant about the mixed signals he is sending is interrupted by him changing into a werewolf. She flees the house screaming, Oz in pursuit. Cain hears the wolf's cry and joins the hunt. The werewolf is distracted by a scent which Cain set as a trap, and Willow escapes and then finds Giles and Buffy, who are about to start the hunt for Oz with a tranquilizer gun. All parties meet in a clearing in the forest, and in the scuffle, it is Willow who shoots Oz, saving everybody. Buffy bends Cain's gun with her bare hands using Slayer strength, and tells him to leave Sunnydale.
At school the next morning, Larry thanks Xander, and Willow seeks out Oz to talk. She points out that she is not fun to be around three days out of the month either. Oz and Willow share their first kiss, leaving Oz a "werewolf in love".