The Fourth Doctor finds himself walking through a cold mist, suddenly encountering another Time Lord. The Time Lords have intercepted the transmat beam he and his companions were riding at the conclusion of their last adventure to give the Doctor an assignment. Foreseeing a time where the Daleks will dominate the universe, they want the Doctor to avert their creation or find some weakness in their makeup. To that end, they have transported the Doctor and his companions to Skaro, the Dalek homeworld, giving the Doctor a Time Ring that will return him to the TARDIS when his mission is complete.
Finding Harry and Sarah, they explore the battlefield, the Doctor theorising that the war has gone on for generations, explaining the regression in technology as resources grow scarce. In the distance, they see a domed city. The trio enter a trench and are caught between two squads of combating soldiers. Harry and the Doctor are dragged into the bunker, and an unconscious Sarah is left among the dead.
The soldiers are Kaleds, who are fighting a war of attrition with the Thals for dominance of Skaro. The Doctor notes that Kaled is an anagram of Dalek. They meet General Ravon, the leader of the Kaled army and Security Commander Nyder, who disbelieves their story about being aliens, as the Kaleds' greatest scientist, Davros, has said there is no life on other planets. Nyder takes custody of the two for interrogation.
Meanwhile, Sarah wanders into the wastelands, unaware that she is being followed by Mutos, the exiled descendants of those mutated by chemical weapons early in the war. In a crumbling structure, she sees an old and crippled man, Davros, his lower body enclosed in what appears to be a sophisticated mobile chair that resembles the bottom half of a Dalek. Davros is accompanied by his assistant, Gharman. As Sarah watches, a Dalek trundles forward and on Davros's command "exterminates" some targets with its weapon....
Davros and Gharman leave; Sarah is taken prisoner, first by the Mutos and then by Thal soldiers. They take her and another Muto, Severin, to the Thal dome as slave labourers. In the Kaled bunker, the Time Ring is confiscated. The Doctor and Harry are taken to a scientist, Ronson, who is startled to find out they are indeed aliens. Davros arrives with his "Mark III travel machine", which detects the Doctor and Harry's non-Kaled physiology. However, before it can kill them, Ronson switches the Dalek off, pleading with Davros that the prisoners may hold valuable information.
In the Thal dome, Sarah discovers that the Thals are building a rocket that they hope will bring them victory in one decisive strike. The slaves are packing the rocket's nose cone with distronic explosives, but without shielding, the exposure will kill them within a few hours.
Ronson confides that some of the scientists believe that Davros's research has turned immoral and evil. Davros is increasing the rate of mutation of the Kaleds, experimenting with creating their final mutated form and putting these "ultimate creatures" in travel machines, which he is now calling Daleks. The Doctor offers to tell the Kaled government about the experiments if Ronson helps them escape.
Sarah organises an abortive escape attempt among the slaves. They try to climb up the scaffolding but many Mutos and Kaled soldiers are killed in the process and Sarah falls off the scaffolding, screaming....
Sarah is rescued, but soon the Thal guards catch up to them and the survivors are recaptured. The Doctor and Harry meet with the Kaled Councillors, including one named Mogran, telling them about how in the future the Daleks will terrorise the universe. The Councillors agree to stop Davros's experiments until an inquiry can take place. However, Nyder's own spies report this meeting, and he informs Davros.
The Doctor and Harry find out that Sarah is in the Thal dome, and make their way there. Meanwhile, Davros seems to take the news from Mogran well, but subsequently orders twenty Daleks to be activated and placed under computer control. Nyder and Davros then meet with the Thal leadership. Davros claims he only wants peace, and is willing to give the Thals a chemical that will weaken the Kaled dome and allow the rocket to work.
The Doctor and Harry overhear this meeting, but continue searching for Sarah. They overpower two guards and steal their radiation suits, entering the silo to free the slaves. The Doctor sends Harry, Sarah and Severin to warn the Kaleds while he sabotages the rocket. Before he can do so, a guard activates an electric grid, stunning the Doctor into unconsciousness....
The Doctor awakens in the Thal control room and watches helplessly as the rocket blows up the now-weakened Kaled dome. In the bunker, Davros vows "revenge" and orders the Daleks to execute Ronson as a traitor, who gave the Thals the chemical secret. Davros declares the Kaled race dead and the rise of the Daleks as the supreme being and ultimate conqueror of the universe. He orders Gharman to implement new variations to the Daleks' genetic structure that will remove all pity and conscience. Gharman carries out the orders, but he is obviously disturbed by this development.
Daleks enter the Thal dome and begin killing people, but the Doctor manages to escape together with a Thal woman, Bettan. He tells Bettan to gather what survivors she can and destroy the Kaled bunker. The Doctor also finds Harry, Sarah and Severin, who did not manage to reach the Kaled dome before it was destroyed. Severin goes with Bettan, and the others go ahead to retrieve the Time Ring from the bunker.
Gharman tries to organise a resistance against Davros but is discovered by Nyder. The three time travellers are also captured when entering the bunker. The Doctor is interrogated by Davros, who wants to know about the future, in particular what mistakes the Daleks will make that will allow them to be defeated, so that he can correct them. If the Doctor does not answer, his friends will suffer. As the Doctor's friends are tortured, Davros demands answers from him....
The Doctor reluctantly answers Davros's questions. The Doctor pleads with Davros to stop the development of the Daleks but to no avail. The Doctor asks Davros a hypothetical question: if he had invented a virus that would destroy all other forms of life on contact, would he use it? Davros considers the question and observes that the power to make that choice would elevate him above the gods, and he would do it. The Doctor, convinced now that Davros is mad, blackmails Davros into halting the development of the Daleks by threatening to switch off his life-support system, rendering him defenceless by restraining his one usable arm. However, the Doctor is discovered and knocked out by Nyder.
When Nyder takes the Doctor back to his cell, another scientist, Kavell, knocks out a guard and frees the TARDIS crew and Gharman. In addition to the Time Ring, the Doctor must now retrieve the tape recording with knowledge of the future. As fighting breaks out between Davros's supports and Gharman's, Davros surrenders. Davros agrees to abort the Dalek project, but wants a vote to be taken on the issue. The Doctor enters the Dalek incubator room and sets up an explosive to destroy the Daleks forever, but staggers out with several embryonic Dalek mutants strangling him....
The Doctor frees himself with Harry and Sarah's help, but finds himself unable to set off the explosives and commit genocide. He tells Sarah that many future worlds became allies because of their fear of the Daleks. If he wipes the Daleks out, he becomes no better than them. When Gharman tells the Doctor of Davros's agreement, he disconnects the wires to attend the meeting.
As Davros and Gharman argue their positions, the Daleks re-enter the bunker, secretly followed by Bettan's rebels, who set up explosives to entomb the Daleks. The TARDIS crew force Nyder to show them where the recording is, but even as the Doctor destroys it, Nyder locks them in the room. Gharman and his faction are killed by the Daleks. Meanwhile, Severin has entered the bunker to warn the Doctor about Bettan's plan and frees them from the room. The Doctor, having retrieved the Time Ring, goes to the incubator room to finish what he started earlier, and the explosives are set off when a Dalek glides forward and completes the circuit with its metal body. The Doctor makes it through the bunker entrance before Bettan's explosives go off, sealing the bunker for a thousand years.
Davros notices that the Dalek automated assembly line has started without his orders. The Daleks no longer obey him; their programming does not allow them to acknowledge any creature as their superior. The Daleks kill Nyder as he tries to alter the assembly and then Davros's supporters. Davros pleads to them that he is the creator and the Daleks will obey him, but the Daleks tell him that they obey no one. Davros attempts to destroy the bunker with a destruct button, but is seemingly killed by the Daleks before he can do so. Despite their entombment, the lead Dalek declares that they will emerge and become the supreme power in the universe.
The Doctor acknowledges that even with the incubator room gone, he has only managed to retard the Daleks' progress by a thousand years or so. As the travellers use the Time Ring to spin away into time and space, Sarah asks the Doctor why he does not seem disappointed. The Doctor replies that although the Daleks will create havoc and destruction for millions of years, he knows that out of their evil must come something good…