The first episode of Season 2 continues directly from the previous season's cliffhanger: Just as Moriarty and Sherlock are locked in a deadly standoff, Moriarty's phone rings. He answers a mysterious call and is forced to abandon his game with Sherlock. The scene hints that the caller, a seductive woman whose hand is shown, possesses something Moriarty desperately wants.
Sherlock returns to Baker Street, and he and John take on numerous cases. Thanks to John's blog, Sherlock becomes an "internet celebrity," attracting more people seeking help, though most cases are trivial. One day, a man who collapses outside 221B brings them a case involving the death of a backpacker. Sherlock deems the case unworthy of his personal attention, so John goes to the scene instead. While they are video-calling, uninvited guests arrive at Baker Street demanding Sherlock put on formal attire and accompany them. Simultaneously, a helicopter arrives for John. Mycroft has summoned them to Buckingham Palace to meet a powerful client.
This influential client has compromising photographs in the possession of a woman named Irene Adler. Mycroft tasks Sherlock with retrieving them. Concurrently, Irene receives a photograph of Sherlock.
Sherlock gains entry to Irene's home by pretending to be a robbery victim. He finds Irene completely nude, who immediately identifies him and states his purpose. John triggers a fire alarm outside, causing a panicked Irene to glance at a mirror, revealing the location of a hidden safe to Sherlock. As Sherlock attempts to crack the combination, armed American men break in, forcing him to open the safe. Sherlock, Irene, and John work together to subdue the intruders. In the confusion, Sherlock steals the secret phone from the safe but is discovered. Irene injects Sherlock with a sedative and escapes.
Although Sherlock loses this first round, during their interaction, a sense of mutual respect ("a meeting of minds") develops between them regarding the backpacker case, leading to a mutual attraction.
Upon learning of the CIA's involvement, Mycroft orders Sherlock to drop the matter. During a Christmas party at Baker Street, Sherlock receives a gift from Irene: the very same phone. Later, in a morgue, he is led to believe Irene is dead after identifying a disfigured corpse as hers, leaving him deeply despondent. However, Irene suddenly appears, takes John hostage, and reveals she is alive. She asks John to retrieve the phone from Sherlock. Sherlock follows John and discovers Irene is alive.
A distracted Sherlock returns to Baker Street to find CIA operatives have kidnapped Mrs. Hudson, demanding the phone. He realizes the phone must contain more than just scandalous photos. Sherlock subdues the agents and rescues Mrs. Hudson. A fugitive Irene arrives at Baker Street. The phone is passcode-protected with the prompt "I'm _ _ _ _ locked." After several failed attempts, Sherlock returns the phone to Irene. It contains an encrypted email from the NSA, which Sherlock deciphers, revealing a flight number targeted for a bomb plot by terrorists.
Irene secretly informs Moriarty of this. Moriarty then taunts Mycroft via text, revealing the British government's plan is compromised. Mycroft meets with Sherlock and explains the situation: both British and American intelligence have moles within the terrorist group who leaked the bomb plot. To protect their agents, they couldn't stop the attack directly but planned to fake the passengers' deaths using corpses to deceive the terrorists. Sherlock's deduction, revealed by Irene to Moriarty, has foiled this delicate operation.
Irene attempts to blackmail Mycroft with the remaining secrets on the phone in exchange for vast sums and her safety, cruelly admitting to Sherlock that she was merely playing him. However, Sherlock, observing her increased pulse and dilated pupils during this speech, realizes she has genuine feelings for him. He deduces the phone's passcode: "I'm sher locked" (a play on "I'm Sherlocked," meaning she is emotionally captivated by him).
Knowing her life is forfeit without the phone's leverage, Irene pleads with Sherlock, but he leaves without a word.
Months later, Mycroft visits John and informs him that Irene was beheaded by terrorists. He asks John to lie to Sherlock, saying Irene entered witness protection in the U.S. John delivers this story. Sherlock asks to keep Irene's phone as a memento. The phone contains many messages from Irene, mostly reading "Let's have dinner," with a final one saying, "Goodbye, Mr. Holmes."
The scene shifts to the execution site. Irene sends her final message and resigns herself to her fate. However, she then hears the distinctive text tone she set for Sherlock. She looks up to see Sherlock, disguised as one of the executioners, who whispers, "When I say 'run,' run." They successfully escape. Sherlock forever remembers Irene as "The Woman"—the only one who ever truly defeated him.