The continent of Tranquela is being swept by waves of madness at regular intervals, causing its inhabitants to turn upon each other in fits of uncontrollable rage. Escoval, head of the Second Family, seems certain that the enemy continent Ameliora has developed a secret weapon, and is urging Abatan, head of the First Family and thus ruler of Tranquela, to open the Armoury which has remained sealed since the truce was declared. Abatan refuses to do so, as the opening of the Armoury would be an act of war. After one fit of madness, Abatan's son Locas turns himself in for the murder of his lover Mariana; they had believed that their love was strong enough to carry them through, but when the madness came Locas threw Mariana over the edge of a cliff. He faces trial before his peers, but before sentence is passed the scientists Ravlos and Kareelya arrive and announce that they have found the cause of the madness -- a strange energy wave which somehow taps into the hidden depths of the human mind. Locas is guilty only of assuming that their people had expunged all trace of evil in their minds; in fact, they have only buried it. The Families vote to forgive Locas, but he knows that he and his father will bear the burden of shame forever. Meanwhile, in a spaceship in orbit around the planet, a cackling alien named the Dwarf Mordant waits to unleash another wave of artificially-generated hatred upon Tranquela.

When the Doctor discovers that everything in the TARDIS is working properly, leaving him with nothing to repair, Peri suggests taking a holiday. For the first time, therefore, the Doctor finds the need to consult the Holiday Ball, a device given to him as an attempted bribe by a Salakan merchant, the Dwarf Mordant. The Salakans roam the galaxy supplying needs to other worlds at an exorbitant cost -- needs which are usually addictive, and which they create if the planet had no such need before they arrived. Despite its unsavoury origins, the Doctor nevertheless operates the Holiday Ball, unaware that upon the moment of its activation it immediately begins to transmit images of himself and Peri to the Dwarf Mordant. Mordant is delighted at first, until the Ball suggests that the Doctor take his holiday on the continent of Tranquela; the whole point of the Holiday Balls was to give the Salakans advanced warning of the Time Lords' intentions so they could be avoided. Furious, Mordant prepares to tune his emotion ray to the frequency of the Holiday Ball, in order to ensure that it will affect the Doctor whenever he comes within range of the Ball...

The Doctor, meanwhile, is looking forward to a return visit to see how Tranquela is getting along after the truce. For fifty years, Tranquela and Ameliora have been completely isolated from each other; it was once possible for the Tranquelans to instantaneously transport themselves anywhere on their planet through thought projection, but this was outlawed after the truce, in case anyone should inadvertently transport themselves to Ameliora. The TARDIS materializes on a beach where Locas has gone to mourn his loss, and when she emerges, he momentarily mistakes her for Mariana. Mordant then blasts the beach with his hate ray, and the natives suddenly attack the Doctor and Peri for no apparent reason. The Doctor, unaware that Peri has been felled by a fallen stone, gets back to the TARDIS, only to be swamped with hatred once he comes within range of the Holiday Ball. Seeking a target for his rage, he sets the TARDIS to seek out the closest targets -- his old friends Ravlos and Kareelya.

Ravlos and Kareelya have isolated the wavelength that is causing their continent such distress, and are near finding a way to shield people from its effects. Upon learning this, Escoval transports himself to Mordant's ship to warn him; thanks to this distraction, Mordant loses control of the beachgoers before they can kill Peri. Mordant gives Escoval a hypno-gun which will cause its victims to obey any orders he gives them, and Escoval returns to the castle and destroys Ravlos and Kareelya's laboratory. The TARDIS materializes amidst the wreckage of the laboratory, and when Ravlos and Kareelya arrive the Doctor attacks them. Kareelya, however, manages to snap a prototype protective helmet over his head, and the Doctor returns to normal. Mordant, monitoring the situation through the Holiday ball, informs Escoval, who plans to accuse the Doctor of being an Amelioran spy; if he can convince Abatan that the Doctor has broken the truce, the Armoury will have to be opened. Escoval thus orders the first two guards he finds to follow him to the laboratory, but as it happens, they are guarding the Armoury and are unable to leave their posts unless given a direct order by Abatan. Infuriated by their disobedience, Escoval turns the hypno-gun on them, and they obey his every further order without question.

Locas apologises to Peri for her shock, and explains the situation on Tranquela. While Locas tells her about his murder of Mariana, Mordant, planning to rid himself of another distraction, focusses the hate ray on Locas, who immediately attempts to kill Peri. Fortunately, he is once again distracted and loses control of Locas, and although Peri accepts that Locas was not fully in control of himself, she nevertheless wishes to be reunited with the Doctor as quickly as possible. She remembers the Doctor mentioning Ravlos and Kareelya earlier, and Locas offers to teleport her to the castle; although it is officially illegal, the youths of Tranquela break the rule all the time. They arrive outside the Armoury only to find it unguarded, and when Locas opens the doors to see if the guards are inside, he and Peri are caught by Abatan. The penalty for looking upon the Armoury is death, and Abatan has no choice but to have both Locas and Peri arrested.

Escoval and the guards enter Ravlos and Kareelya's laboratory to arrest the Doctor just as Ravlos removes the helmet, trying to assess the Doctor's condition. The Doctor, once again mad with rage, attacks Escoval and the guards and knocks them out, but in the confusion Ravlos is able to put the helmet back on his head. They realize that the madness only affects the Doctor while he is within range of the TARDIS, and once he understands this, the Doctor quickly concludes that the Holiday Ball must be the source of the madness -- which means that the Dwarf Mordant is responsible for what is happening to Tranquela. Abatan arrives to question Ravlos and Kareelya on their progress, but the recovering Escoval claims that they are in league with the Doctor, an Amelioran spy -- and the hypnotised guards confirm his lie. Abatan nevertheless sends them to prison for deserting their post.

Ravlos and Kareelya, observing events on the TARDIS scanner, inform the Doctor that the ability to lie has been bred out of the Ruling Families; Abatan is thus unable to conceive of the possibility that Escoval is not telling the truth, and seems to have no choice but to open the Armoury. Ravlos and Kareelya emerge from the TARDIS to convince him otherwise, while the Doctor covers the Holiday Ball with the helmet and sets off for Ameliora to warn them of the danger. In the confusion caused when the TARDIS dematerializes, however, Escoval surreptitiously shoots both Ravlos and Kareelya with the hypno-gun and orders them to confess to treason. They do so, and Abatan has them arrested and gives the order to open the Armoury.

Locas tells Peri that although it is theoretically possible for him to teleport them both to safety, their flight would disgrace his family, and Abatan would be forced to step down and place Escoval the warmonger in charge. When the guards from the Armoury arrive, followed shortly thereafter by Ravlos and Kareelya, Locas and Peri realize that there is something odd about their behaviour and question them. Conditioned to obey all orders, Escoval's victims tell the truth, and Locas realizes that Escoval is deliberately trying to start a war in order to gain power for himself. He has no choice but to teleport out of the cells with Peri and try to prove the truth. When Abatan arrives to question Locas he is horrified to learn that his son has taken the coward's way out, but as he prepares to leave and hand power over to Escoval, Ravlos and Kareelya finally shake off Escoval's conditioning and manage to communicate the truth to Abatan.

The Doctor finds Ameliora to be a fog-bound continent, where every citizen wears an implant connecting them to a Central Computer which regulates their moral purity. He is captured and tortured, but manages to explain that the Tranquelans are being misled into re-opening their Armoury. The Ameliorans release him to deliver a message; although the Ameliorans would never break the treaty without provocation, they are fully aware of the Tranquelans' moral inferiority, and will welcome the chance to respond in kind to any attack and thus bring every Tranquelan under the control of Central Computer. Locas, meanwhile, tries to find the TARDIS by homing in on the image of the Holiday Ball, but he and Peri end up on Mordant's ship first. Uncertain where they are, Peri describes the TARDIS to Locas, who manages to locate it; there, they are reunited with the Doctor, who explains that they must locate Mordant and stop him from plunging both continents into war.

Escoval, believing that all is going according to plan, visits Mordant to go over the final contracts with him. Mordant is planning to sell Escoval both arms and a drug which will keep the defeated Ameliorans pacified and under control, and he also offers Escoval contracts to sell his prisoners of war as slave labour to other planets. As they talk, Mordant fires a fear ray at Ameliora to ensure that Escoval's attack succeeds, but the Doctor manages to resist the horrors unleashed in his mind by the fear ray and dematerializes. He then uses a wave tracker to follow the Holiday Ball's transmissions to their source on Mordant's ship, where Locas confronts Escoval and pursues him back to Tranquela; there, Abatan is waiting for him, and he shoots the traitorous Escoval dead.

The Doctor orders Mordant to bathe both continents with emotions of peace and tranquility; if he refuses, the Doctor will inform the Time Lords that Mordant has been using the Holiday Balls to spy on them, and they will erase him from history. Mordant hastily does as the Doctor requests, destroys the Holiday Balls, and sets off to seek his fortune elsewhere. Locas takes word of the changed situation to Ameliora and negotiates a new truce, and the Armouries of both continents are closed again. Now that Locas has proven his maturity by taking the dangerous journey to Ameliora, Abatan reveals to him that Mariana survived her fall by teleporting herself to safety, and the lovers are reunited.