Sayid and Desmond confront "Kevin Johnson," who is really their fellow crash survivor Michael, demanding to know how he came to be on the freighter. Through a series of flashbacks, we learn the story.
Although he and Walt did make it back from the island thanks to Ben, Michael is haunted, literally, by the deaths of Ana Lucia and Libby, who he killed when freeing Ben from the Hatch. He has visions of Libby a couple of times. Walt, apparently, won't talk to him because he knows what Michael has done.
After pawning the watch Jin gave him in exchange for a handgun, Michael creeps into a New York alley to shoot himself, but is stopped by, of all people!, Mr. Friendly/Tom from the island. Turns out Tom is one of those Others who comes and goes from the island (and lives well, staying in penthouse suites, when he does so), and he has a job for Michael to do. Michael must go undercover and kill those aboard Widmore's freighter before it can reach the island. Doing so will save everyone on the island.
Tom also claims Widmore is behind the staged Oceanic wreckage, having dug up 324 bodies from a mass grave in Thailand, buying a junked plane and sinking it in the ocean in order to cover up the location of the island, which he's somehow found and wants.
But once he's aboard the freighter, Michael gets a message from Ben, who tells him it's too early to do the deed. Ben wants a list of everyone on the ship, because some are innocent and can't be killed (there we go with these mysterious lists again). So Michael evidently goes about making his list. He's also the guy behind the destruction of the ships radio room and the disabling of its engines.
When Sayid hears all this, he grabs Michael and brings him to the freighter captain, outing Michael as a spy for Ben--after all, the Captain has given Sayid and Desmond the impression that it was Ben who staged the fake wreck, and they think Widmore is their key to rescue.
Meanwhile, back in Locke-town, Ben spills the beans to everyone about Michael being his spy and makes it clear to them that Widmore's people are there to seize the island and kill everyone on it. He also secretly urges Alex and Karl to go with Danielle to an area of the island called "the sanctuary." That's where the Others have vanished to, and it'll be a safe place when Widmore's people reach the island.
But as those three make their way to the sanctuary, both Karl and Danielle are suddenly shot and killed. Alex, fearing she's next raises her hands and calls out that she is Ben's daughter.
* Who fired the shots that killed Karl and Danielle? Most likely it was the mercenary types shown doing target practice office on the freighter. Remember, we saw Frank leaving in the helicopter on a "mission" of some sort. I think he brought the mercenaries to the island and they've begun their attack.
* What will happen to Michael, now that he's been outed as a spy?
* Miles has some pretty cool psychic powers. He knew that "Kevin" wasn't Michael's real name. But did he realize Michael that was a spy? If so, he kept it to himself. Maybe this was part of his con on Ben--he wants to get $3 million bucks out of him in exchange for saving him from Widmore.
* Frank tells Michael that he's aboard the freighter because he knows that the Oceanic wreckage shown on television isn't the real thing and Widmore evidently agrees. Does he really believe he's on a rescue mission?
* Libby, in Michael's first vision of her, is bringing him blankets. When he shot Libby in the Hatch, she was getting blankets.
* What's the story on the temple? Why is it a safe spot? What are the Others doing there?
* The tune on Michael's car radio when he tries to kill himself the first time is "It's Getting Better" by Mama Cass. In season 2, Desmond's listens to Cass' "Make Your Own Kind of Music" in the Hatch.
* Here's a translation of the inscription on the back of Jin's watch.
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