A man on a bike pedals for his life, being chased by armed assailants. He reaches his apartment building, drops his bike and runs inside. He pulls a digital camcorder from his backpack and is able to email out its contents before the men break in and asphyxiate him. This man, it turns out, is Leonard "Diddle" Callahan, and a college friend of Gus'. Shawn and Gus attend Diddle's funeral, where the minister says Diddle died from a hit and run accident on his bike. There, Shawn discovers, that not only was Gus in a singing group, but he has been estranged from Diddle, Tony and Joon for years and refuses to say why. Shawn also notices a mourner with a scar on his face who seems out of place there. Tony and Joon are able to speak to Shawn alone. They tell him Diddle was way too careful on his bike to die in an accident. They believe he was murdered, and they hire Shawn to find out what happened.
In the Psych office, Tony and Joon tell Shawn about the email they got from Diddle the night he died. Titled, "It's so hard to say goodbye," the email came with a large, heavily encrypted attachment. Diddle worked for Cybervault, a company that encrypts data for other companies and the government. The guys think Diddle must have run across secret information someone else wanted. They all head to Diddle's apartment where Shawn notices how meticulous Diddle was. He sees new hinges on the door and Diddle's bike safety gear hung neatly on the wall - gear he would never leave behind on a bike ride. Shawn also notices some of Diddle's computer gear is missing and decides it's time to bring in the cops. But Lassiter and Juliet uncharacteristically shut them down, so they are forced to sneak into the coroner's office where they discover Diddle's injuries are consistent with asphyxiation. The accident was used to cover the murder, which means, since Gus, Tony and Joon received the emailed file, their lives are now in danger, too. As Shawn and Gus report this back to Tony and Joon, Tony's car blows up in front of them.
The cops now have to take the murder investigation seriously, but they refuse to allow Shawn and Gus on the case, citing a conflict of interest. Shawn and Gus are on their own, then, as they stash Tony and Joon with Henry and head to Cybervault to investigate. As they enter the building, the man with the scar is watching them. Once inside, they meet Diddle's supervisor Mr. Tully and his assistant Chelsea. They ask Tully for help decrypting Diddle's email but Tully tells them Diddle was too good. Shawn and Gus check out Diddle's desk where they discover the last thing Diddle wrote was a couple of addresses. They also notice a gap in his books, which allowed him to stare at Chelsea all day. They talk to Chelsea, who says Diddle finally got up the nerve to ask her out right before he died. She can't really tell them that much more, but Gus gives her his personal number in case she remembers anything. Back at Henry's house, Shawn looks up the addresses, which are in sketchy areas of town. While there, Chelsea calls Gus and asks him to drinks, infuriating Tony and Joon, who say Gus will always sell out his boys for women, which is what broke up the group. Shawn and Gus then leave to go check out the addresses, but Tony and Joon follow. The first warehouse seems to have been recently cleaned out, but before they can check out the second, Tony and Joon are kidnapped.
Back at the police station, Lassiter and Juliet are angry with Shawn and Gus. They told them to stay out of it and now they've gotten Tony and Joon kidnapped. They continue to freeze out the guys, so Shawn and Gus head to the second warehouse on their own where they witness a drug deal between one of Diddle's killers and the man with the scar. Gus' cell phone goes off, giving away their position. The guys are able to escape from the killer, but the man with the scar holds a gun on them and orders them into his car - the same one that took Tony and Joon.
Shawn and Gus are cuffed and blindfolded in a room, but when they are able to see again, they realize they are in the police station with Lassiter, Juliet and the man with the scar, who turns out to be Agent Johnson, a narcotics officer currently running an undercover sting operation. Tony and Joon are safe in the next room. The cops tell Shawn and Gus that someone cracked their security network and discovered where they keep the confiscated drugs and weapons from their busts. Diddle must have discovered the security breach and videotaped one of the transactions, but no one has been able to decrypt the file yet. As Gus is reunited with Tony and Joon, Shawn realizes that the key to crack Diddle's code is their voices. They sing "It's so hard to say goodbye" into a mike hooked up to the computer and are finally able to see the video - and the identity of the rat at Cybervault. It's Chelsea. Diddle didn't have a crush on Chelsea, he was spying on her and she got him killed. Chelsea is arrested and the singing group is finally reunited.