The witch Nimueh creates a tiny creature from clay, places it inside an egg and brings the creature to life with a spell. She directs the egg into the river which supplies Camelot with water. The egg surfaces inside a vault under the castle, and hatches.
Gaius and Merlin attend to a man who has died from unknown causes. They cover the corpse with a sheet so as not to alarm the townspeople. Gwen (Guinevere) encounters them when returning from a visit to her father, the local blacksmith; but Merlin manages to stop her from seeing what's under the sheet. Gaius examines the body and concludes that the man's disease was caused by sorcery. Before he can investigate any further, Prince Arthur arrives for Merlin and summons Gaius before the king. One of the royal court has died from the same plague that killed the first victim, and King Uther demands to know what Gaius has found out. Under pressure Gaius admits sorcery as the likely cause. Uther states that this kind of magic undermines his authority, and worries that if he cannot find the culprit then people will turn to magic for a cure. He orders Arthur to conduct searches of every house in town.
Merlin cannot understand why anyone would want to harm others with magic. Gaius tells him that magic corrupts, and is only as "good" or "bad" as its user. Their investigations are interrupted by Arthur and his guards, who search the house. Merlin panics because his book of sorcery is upstairs, but he manages to magically hide it while Arthur is distracted. Arthur leaves and Merlin becomes angry that Gaius will not let him use magic to help the victims. Gaius says the only way to help is to discover the source of the plague. He tells a frustrated Merlin that his time to be a great sorcerer will come.
By the time Arthur's search is concluded, many more victims of the plague have died. Uther commands him to impose a curfew and isolate the lower section of the city, where most of the victims lived. However, Gaius knows the plague is not spread through human contact because a royal courtier would not have been near the lower city. He and Merlin deduce that the disease is waterborne. Gwen's father, Tom, has contracted the plague, and Gwen begs Gaius to save him. She runs away sobbing when Gaius tells her there is no cure. That night, Merlin uses his magic to evade the royal guards and travels to the lower city to cure Tom.
Gaius tells King Uther that the contaminated water comes from the pump which supplies the city. Merlin pretends to be surprised that Gwen's father has recovered, but is not convincing enough. She wonders how he knew Tom would survive, and laughs at Merlin's explanation that he is "psychic." Arthur soon finds out that Tom has made a full recovery. The house is searched and Arthur finds the magical poultice which Merlin placed under the man's pillow. Gwen is arrested for witchcraft and dragged before the king. She is sentenced to death despite Morgana and Arthur protesting her innocence.
Merlin is reminded by Gaius that being a wizard carries responsibilities. He visits Gwen in the dungeon where she is being held, and promises not to let her die. He goes to the king's council and confesses to curing her father but Arthur manages to convince the king and his council Merlin is in love with Gwen and trying to protect her. Merlin in private criticises Arthur, but Gaius points out Arthur has likely saved his life. He and Gaius take a sample of the water inside the vault and discover the creature that Nimueh placed there. According to Gaius's book this is an Afanc, which can only be created by the most powerful of sorcerers. Once again Merlin travels to see the Great Dragon. He is told to use the "elements" available and that he is "one side of a coin," of which Arthur is the other. Meanwhile Uther, desperate to stop people dying, moves Gwen's execution forward to that evening.
With help from Gaius, Merlin works out that since clay is made from two of the four elements (earth and water), then he may be able to stop the Afanc with the other two: air and fire. Morgana comes to inform them that Gwen is to be executed in the evening. Merlin says he needs Arthur's help, and she convinces Arthur to do what is right. Merlin, Arthur and Morgana go down to the vault where the Afanc lurks. The Afanc attacks and Arthur kills it; the help of a spell from Merlin turns Arthur's torch into a powerful flamethrower, covering the Afanc in flames and destroying it. Nimueh is watching with the use of magic, and curses Merlin for ruining her scheme.
Gaius goes to the king and presents the remains of the egg which the Afanc hatched from. Nimueh's mark is engraved into the shell. Uther becomes very afraid and it is clear that this is not the first time she has threatened Camelot. Gwen is released and thanks Merlin for saving her. Morgana tells Merlin that she knows "his secret" and it is safe with her. Merlin initially interprets this as her knowing of his magical abilities, but when Morgana then says that Gwen is "a very lucky woman," her meaning becomes less clear.
From her vantage point, Nimueh swears revenge on Merlin.