Mike Yates is given light duties whilst recovering from his brainwashing in Llanfairfach, and one such mission sends him to the coastal village of Tayborough Sands to investigate a lighthouse keeper's report of a light falling into the sea. Yates expects little to come of his investigation, and finds the lighthouse keeper Derek Elkins to be an unreliable witness. There have, however, been a number of uncharacteristically violent incidents in the town recently, and shortly after checking in at a bed and breakfast, Yates notices a commotion at the docks. The fishing vessel Papillon has just come into port with its crew dead; one of the crew members apparently has torn all of his fellows apart with his bare hands.

The TARDIS arrives in Tayborough Sands, where the Doctor promises Tegan and Turlough the chance to relax but soon receives a telepathic impression of alien evil. He decides to investigate without worrying his companions, but Tegan becomes irritated when she realizes that he's hiding something from her. She tries to cool off in the local pub, where she is rescued from a violent local thug by off-duty policeman Andy Weathers. Andy and Tegan hit it off, and agree to meet for a picnic the next day. Meanwhile, the Maybury family arrives in town for a much-needed holiday; the unemployed Tony is already fighting with his wife Imogen, and their daughter Charlotte doesn't want to admit that she might be pregnant. When the tensions between Tony and Imogen finally erupt, Tony storms off to eat fish and chips by himself while their sullen son Chris heads off for the funfair, to get as far away from his family as possible.

The Doctor notices the commotion at his docks, and when he uses his UNIT credentials to get in, he learns that Mike is present and contacts him. Mike is startled by the Doctor's change of face but accepts it, and when the Doctor tells him about his telepathic contact, Mike decides to call in reinforcements. The Brigadier arrives with a squad of UNIT troops, and they establish themselves at the local naval base. Tegan, still irritated with the Doctor, goes for a walk on the beach, but Turlough follows and brings her back to the hotel, trying to smooth over the tension between his fellow travellers. Later that night, a drunken Chris Maybury staggers down to the beach to find somewhere to sleep, but is attacked and torn apart by an alien monster in the caves.

A violent bar brawl at the Black Falcon ends with a man stabbed to death with a broken liquor bottle, and when the paramedics remove his shirt they find dozens of tiny black quills sticking out of the man's chest. The Doctor studies the body and attempts to analyse the jelly-like substance on the tips of the quills. They may be dealing with a contamination in the water -- which means that the UNIT troops are in jeopardy due to the fish dinner they'd eaten upon arriving. The Brigadier attempts to contact Whitehall to convince them to quarantine the town, but the government is unwilling to declare a state of emergency without further evidence. The Brigadier begins to have trouble concentrating on the task at hand...

The Doctor learns that large amounts of a jelly-like substance have been washing up on the beach for weeks, but when he analyses it in the TARDIS he is unable to detect any physical characteristics. He places the jelly into his IRIS machine on a hunch, and then pilots the TARDIS to the area where Elkins reported seeing the light plunge into the ocean. It arrives on a spaceship which used to be a Morok battle cruiser but which now has other alien technology added to it, and he and Turlough are attacked and nearly torn apart by vicious alien hunter-killers. The Doctor communicates telepathically with them, confusing them just long enough for himself and Turlough to reach safety in the TARDIS. There, he identifies them as the Xaranthi, vicious killers whose homeworld was destroyed by the Zygons. The Xaranthi secrete their knowledge and memory in physical form in order to create a super-intelligent Hive Queen; it is this substance which has been washing up on the beach, and it is transforming the people of Tayborough Sands into Xaranthi hybrids.

Tegan and Andy go sunbathing and swimming, but while shopping for picnic supplies at the supermarket, Andy starts to feel ill and collapses. Tegan manages to get him home to rest, but once she returns to the hotel, the Doctor is forced to admit what's happening. Realizing what has happened to Andy, she tries to contact him, but he's no longer answering his phone. Meanwhile, a Xaranthi hybrid emerges from the caves on the beach when two holidaymakers venture too close, and it slaughters its way through the sunbathers, retreating to the funfair when UNIT troops arrive. Charlotte has just identified Chris' body at the morgue, and when she returns to the boarding house to tell her father, Mike accompanies her and finds that Tony is transforming into an alien monster. He is forced to shoot him to save Charlotte's life. Charlotte and Imogen are taken to the hospital, while Mike goes to the beach to deal with the aftermath of the Xaranthi attack. There, the Doctor realizes that the Brigadier and the rest of his men are also beginning to transform into hybrids. The Doctor takes them to the funfair to confront the hybrid, hoping that he can still reverse the change if he is able to communicate with the Xaranthi Queen.

The Xaranthi hides in the Ghost Train, and the UNIT troops enter from both sides, hoping to trap it. However, they are having trouble concentrating as the change increases their aggression, and when they stumble across the Xaranthi they instinctively open fire on it. The Doctor calms things down and tries to communicate with the Xaranthi, but Mike, upon hearing the gunfire, rushes into the Ghost Train, sees the Xaranthi towering over the Doctor, and shoots it. In a dying spasm, the Xaranthi stabs the Doctor with its stinger, infecting him, and the Doctor passes out. The Xaranthi hybrids now come out into the open and march on the funfair, and Turlough panics and flees back to the hotel -- only to find that the hybrids are roaming the streets of Tayborough Sands, killing everyone they encounter.

The Brigadier succumbs to the mental transformation, but Benton fights it off for a few minutes longer and helps Mike and Tegan to get the Doctor to safety. Tegan insists that they stop to see whether Andy is safe, but he too has transformed into a hybrid and Mike must shoot and kill him to save his own life. Tegan seems to go into shock upon seeing the bodies scattered about the town, but when they reach the hospital and she dispassionately describes what was done to the "unsuitable" patients by the Xaranthi, she realizes she too is falling victim to the transformation. Some of the patients, including Charlotte, have isolated themselves in the quarantine area on the top floor of the hospital, and Mike gets the Doctor and Tegan in before the doctors and patients realize that they're infected too. The Doctor awakens and orders Mike to let him go so he can find a way to solve the situation. Mike and Tegan remain, and Mike is forced to watch Tegan, knowing that if she transforms completely he will be forced to kill her.

The Doctor is in the initial stages of the transformation, but this gives him the ability to walk through the town unmolested by the other hybrids. The infected UNIT troops, seeking the TARDIS, return to the hotel and find Turlough hiding in his room. He attempts to escape, but they track him down and force him to lead them to the TARDIS. Unfortunately for Turlough the Doctor has already reached it and dematerializes, and the UNIT troops take out their frustration by marching Turlough down to the beach and attempting to drown him.

Inside the TARDIS, the IRIS machine has completed its work, confirming the Doctor's suspicions; the transforming agent is not chemical or biological at all, but psychic -- the thoughts of the Xaranthi distilled into physical form. The Doctor returns to the Xaranthi ship to confront the Queen, and, using ordinary tap water and the force of his own willpower, he is able to reverse his own infection and convince the Xaranthi that he holds the power to destroy him. The Xaranthi withdraw their mental influence from their victims, retreat to their ship and flee the Earth. Their victims awaken with muddled memories of the past few days, but in many cases the scars and emotional disturbances will not be so easily healed. Turlough's life is saved when the UNIT troops collapse unconscious, and Tegan recovers with no memory of what has happened to her. The Doctor decides to depart with them, leaving Mike to clear up the aftermath, before the Brigadier recovers and begins to ask awkward questions.