Long ago on the planet Peladon, the brutal tyrant Erak was supposedly defeated by Sherak, son of Erak’s former champion Gart. What nobody but Sherak and Gart knew was that Sherak would have lost if Gart had not stepped in at the last moment to save his son’s life. Sherak grew to be a wise king and united all of Peladon under his rule, but still remained haunted by the fear that he was not worthy of his position. One day he set out on a quest to prove himself, and beyond the peak of Mount Megashra he found and tamed the wild beast Aggedor, which became the sacred symbol of his world. Many generations later, the still-primitive planet was introduced to the Galactic Federation when a spaceship from Earth crashed on the planet, and under the rule of the half-human King Peladon of Peladon -- and with the help of the Third Doctor and Jo Grant -- Peladon itself joined the Federation. The Third Doctor and Jo went on to visit other worlds, and on one such occasion they saved the inhabitants of the planet Pakha from a madman possessed by the spirit of the Ancient Diadem, a crystal tiara inhabited by an evil intelligence which had plunged Pakha into centuries of war. The threat was thwarted when the mad Vor’r’na fell into a bottomless abyss, taking the Diadem with him. But even then the Doctor feared that the Diadem had not been completely destroyed…

Fifty years after his last visit to Peladon, the Seventh Doctor is contacted by the Federation chairman, who needs his help. The chairman’s daughter Damajina and a Pakhar reporter named Keri recently discovered the location of the Ancient Diadem, and sponsored an expedition to look for it -- but Jina’s lover Alec turned out to be a criminal who had been stealing priceless archaeological treasures from the planet, and he killed her when she discovered the truth. “Alec” has since vanished, and it is believed that he has disguised himself and fled to Peladon. Keri is already on Peladon, preparing to broadcast the occasion of King Tarrol’s Restatement Vows; in the midst of the pomp and ceremony, the killer could remain hidden until it’s too late to find him again. The Doctor, fearing the consequences should the Diadem be unearthed, agrees to visit Peladon with Benny, Jina’s brother Kort, and an Ice Warrior delegation -- but while Benny is delighted to mix with Ice Warriors at last, the Doctor doesn’t trust Ice Lord Savaar or his adjutant Sskeet at all.

While the Doctor and Benny are busy on Peladon, the Doctor sends Ace to Pakha to try to find out what’s happening to the Diadem. A team of mercenaries hired by “Alec” are also on its trail, and they bribe a Pakhar named Hyn’t’n to give them the location of the expedition -- and then kill him. The expedition has located the Diadem, but when Professor Sharrod touches it he falls under its influence and murders his students, convinced that they’re plotting against him. The mercenaries arrive, shoot him and take the Diadem, and Ace arrives far too late to do anything about it. She manages to get to a shuttle and set off in pursuit, but the mercenaries realise that they’re being followed and fire back at her. She scrambles their ship’s systems with an electromagnetic pulse, preventing them from finishing her off, but is unable to continue pursuing them and is forced to send out a distress signal and wait for help. But the EMP has knocked out the safety seals on the vacuum case containing the Diadem, and the evil within is already beginning to influence the mercenary Sadler.

Upon arriving on Peladon, the Doctor is greeted by his old friends Alpha Centauri and the Lady Lianna, former handmaiden to Queen Thalira -- and Federation representative Nic Reece, which surprises him, as he’s never met Reece before. Lianna speaks privately with the Doctor, warning him that all is not well on Peladon; the mines have been all but worked out, and Reece’s suggestion that the planet concentrate on its tourist industry has angered Lianna’s daughter, High Priestess Atissa, who feels that such an approach would cheapen Peladon’s cultural and spiritual heritage. Benny is attracted to the charismatic Reece, but he is already involved in an affair with Lianna, and in any case he has just lost his wife and daughter in a shuttle crash.

Soon after the Doctor’s arrival, the curator of the crown jewels is murdered and the Lance of Aggedor is stolen. The Doctor pushes his way into the investigation, irritating Ice Lord Savaar, who realises that the Doctor still does not trust his kind. Before the Doctor can determine who the killer is, Lianna is also murdered, impaled on the Lance of Aggedor itself. The Doctor is found holding the Lance in her body, and although he claims he was trying to remove it, he is placed under arrest -- and in the confusion, the Crown of Sherak also disappears. Atissa calls for the Doctor’s execution, and it appears that Tarrol has no choice but to sentence the Doctor to death. Benny and Alpha Centauri appeal the verdict, but he refuses to change his decision -- and then Savaar requests permission to execute the Doctor personally, to avenge the Ice Warriors’ past defeats at his hands. The Doctor privately admits to Benny that Lianna died in his arms, naming her killer as she did so -- but he’s not ready to divulge the killer’s identity yet, as he is hoping to use the killer as bait to draw the Ancient Diadem out into the open.

Keri tries to discuss Jina’s murder with Kort, but at first he is unwilling to speak to her. He eventually explains that he is upset that the Pakhan government sent one of their representatives to Jina’s funeral, contravening the Cantryan people’s traditions -- but Keri reveals that she was well aware of those traditions and had specified that no Pakhars were to attend the funeral. She and Kort hack into the Federation data base in the Ice Warriors’ shuttle, and discover that the purported official, Hyn’t’n, was in fact a petty criminal who was recently murdered himself. Before they can learn anything more they are caught hacking into the Warriors’ computers and arrested, but Savaar questions them, determines that their motives were benign, and asks Keri to help him in a deception. Meanwhile, Keri’s producer Neal Corry spots figures moving in the supposedly disused refinery, and is taken prisoner when he investigates. Soon Keri is short a cameraman as well, when Jav learns who the killer is but unadvisedly tries to blackmail him without preparing an escape route first... After murdering Jav, the killer disguises himeslf as Savaar and attacks Atissa, knocking her out and stealing the Sword of Truth, the last of Peladon’s three great treasures.

Benny must watch helplessly as Keri records the Doctor’s execution at Savaar’s hands, but she later learns that Keri was in fact transmitting a hologram of the Doctor in order to lull Atissa into a false sense of security. Believing that the Doctor is dead, Atissa orders Tarrol to expel all aliens from Peladon; from now on he will be a puppet monarch, and she and her followers will restore the traditional ways. Tarrol is forced to admit to himself that Atissa is too far gone to see reason. Atissa prepares to execute Savaar herself for his attack on her, but Benny rescues him by shooting him with a phaser set to a level which momentarily shuts down his metabolism. Once he has recovered, he contacts Marshal Hissel on the mothership and orders him to leave orbit. Hissel does so, and sends a message to the Federation telling them that their delegation has been killed and that he has been forced to abandon Peladon. The mercenaries with the Diadem pick up this transmission and come in to land, believing that it is now safe for them to do so. But Sadler has nearly succumbed to the influence of the Diadem.

Sskeet reveals to the Doctor that an Ice Warrior garrison has been hiding in the refinery, waiting for the mercenaries to arrive and contact the killer. Corry is safe and well, but was kept hidden when he discovered the truth. The Doctor returns to the citadel to contact Benny and reveal the truth, but he is too late. Nic Reece, preparing to depart this unwelcoming planet, has invited Benny to his shuttle to bid him farewell, and Benny goes with him only to realise too late that this is not the real Nic Reece at all. The shuttle crash which killed Reece’s family was staged by this man, the killer, to lure Reece away from Peladon so this man could kill him and take his place. “Reece” has planted a booby-trap in his quarters, and when Sskeet tries to break in, the resulting explosion kills the King’s Councillor Geban. The Doctor, Tarrol and the Federation representatives pursue Reece to the Martian shuttle, but he has already killed the pilot and taken Benny hostage. He takes her to meet his mercenaries, intending to trade the stolen crown treasures for the Diadem; with its power, he will take control of Peladon, and through Keri’s news team the Diadem will broadcast its power throughout the Federation, plunging it into eternal war.

Savaar orders Commander Rassburr’s hidden garrison into action, and accompanies the Doctor and Tarrol after Reece. As they approach the rendezvous, the Diadem senses the return of the man who nearly destroyed it once, and forces Sadler to flee with it to safety. Her lover Lambert pursues her, but takes a wrong turn and ends up at the refinery, where his mind is destroyed by its neural alarm systems. Rassburr and his garrison kill the rest of the mercenaries, but Reece flings a Sontaran fragmentation grenade at them and brings the roof down. Tarrol faces Reece with the Sword of Truth, and the Sword absorbs the bolts from Reece’s blaster, protecting its king. When Reece tries to grab the Sword out of Tarrol’s hands, his fingers are severed and he falls from the mountain to his death. Sadler, now entirely possessed by the Diadem, tries to flee in the mercenaries’ ship, but Hissel has returned to orbit, and he shoots down the shuttle before the Diadem can respond.

Atissa, feeling that her king has made a fool of her, denounces Pel society and exiles herself to the outer plains. Having lost his two closest advisors, Tarrol decides to cut his planet’s ties to the Federation, but the Doctor advises him to invite them back in fifty years to see whether Peladon can stand on its own. The Doctor knows that soon the Daleks will attack the Federation; now Peladon will be left out of the war. Benny, still upset with the Doctor for neglecting to tell her that Reece was the killer, decides to take a holiday and join the archaeological dig on Phaester Osiris; the Doctor agrees to contact her at the Braxiatel Collection in three months’ time, and gives her a homing beacon in case she needs to contact him before that. All seems well, but the Doctor fears that the Diadem has not been completely destroyed. And he’s right. It’s out on the surface of Peladon, lying amongst the remains of Sadler’s shuttle, recuperating and waiting to be found again.