When Queeg goes to his interview with ComServPac, Willie and Keefer work on their incident reports about Urban's shirttail. Willie has trouble with his report, but Keefer enjoys writing military prose. Keefer offers to write Willie's report for him. Keefer says that Queeg's nitpicking, despite its apparent uselessness, is still far preferable to De Vriess's sarcasm. In the meantime, Captain Grace of ComServPac is unsatisfied with Queeg's account of the incident. He is annoyed that Queeg distributes the blame between his subordinates. Queeg says he thought it was understood that as captain, he is responsible for the shortcomings of his officers. Grace asks Queeg to speak frankly, off the record, and explain why he did not retrieve the practice target. Queeg still attempts to maintain his innocence, resting the blame on the inexperience and poor training of his crew. Grace asks Queeg if he had turned completely around and cut his own towing line. Queeg treats this question as a personal insult. Grace then reveals that someone aboard the Caine had reported this rumor.
Grace asks Queeg a series of straightforward questions, completely off the record: whether the Caine is combat-worthy, whether Queeg is happy with his assignment, and whether Queeg would prefer a stateside assignment. Queeg answers the first two questions noncommittally. To the third, he proudly responds that he wants to be captain of the Caine. Despite his disappointment with the assignment, he says, he is determined to make it into a success through commitment to Navy regulations. Grace is impressed with the answer and decides that despite Queeg's shortcomings, he is a good officer. He accepts Queeg's incident report and the two part on good terms.
Captain Queeg returns to the Caine on the warpath. He immediately chews out Stilwell for reading a comic book while on duty, punishing him with six months' confinement to the ship. Queeg calls Keefer to his cabin and reprimands him for his incident report and orders him to write another one, using Willie's report as a model. Having written both reports in exactly the same style, Keefer is barely able to contain his laughter. Back at ComServPac, Captain Grace reports his impression of the Queeg interview to his Admiral. He admits that there is much to dislike about Queeg; he always had an excuse, and he wasn't very bright. Grace also speaks of Queeg's tenacity and resolve, however. He attributes the accidents to the jitters of being a first-time commanding officer. The Admiral accepts this evaluation but wants Queeg out of his hair, so he assigns the Caine the most prized mission of the war: a trip to the States for overhaul and modifications.
The Caine crew celebrates its stateside orders. Queeg is overjoyed and takes advantage of his situation by buying the crew's extra liquor rations and having them put aboard the ship, planning to smuggle them onto the mainland. Willie writes a letter to May Wynn, hinting that he would be overjoyed if she were in San Francisco to greet him. He writes a letter to his mother discouraging her from making the trip. Stilwell comes to ask Willie whether the six months' confinement extends to their shore leave. Stilwell says he needs to get off because of trouble in his marriage. Willie promises to ask the captain for clarification. During the trip to San Francisco, Queeg decides that the ship needs more drills, and rings the alarm for battle stations. The sailors don't bother putting on life jackets or helmets, since it is a drill. Queeg assigns the entire enlisted crew three days of suspension to ship. He also denies Stilwell leave time.
Before docking in San Francisco, Queeg makes a stop in Oakland to drop off his smuggled liquor. Queeg orders Mackenzie, who had been holding the boat alongside the dock, to help with the lifting. This causes a space to open between the Caine and the dock, and the box goes into the water. Because of the hour lost in the liquor operation, the tide alongside the pier is strong, and Queeg misjudges it twice. The minesweeper rams the deck twice before finally getting its lines secured. Queeg announces that the entire crew is sentenced to two extra days of confinement for poor line handling. As an officer, Willie is exempt. He is overcome with emotion upon seeing May Wynn and his mother on shore. The two women stand side by side, and he is forced to introduce them.
Captain Queeg becomes increasingly dislikable. We see his character flaws during the ComServPac interview and the events that follow. When Grace calls Queeg's bluff on the incident report and exposes Queeg's unwillingness to accept responsibility, the captain resorts to lying. He will not admit to his mistake. In Grace's later interview with the admiral, we see that Grace recognizes Queeg's lying without difficulty, seeing right through the captain's ranting and raving about circumstance and proper decision-making. In his meeting with Queeg, Captain Grace makes an astute evaluation of the captain, saying that even though the captain is not very bright, he is "earnest enough and probably pretty tough." He understands that Queeg is more or less harmless, and is, to some extent, exactly what the Navy needs. Queeg is not smart enough to pose any real threat. He fits perfectly into Keefer's model of the Navy man as a "trained ape."