The TARDIS materialises on a human colony world in Rose’s future, but life in its sole city is stale and mundane, almost too mundane. The news reports are all about ordinary people’s tax credits and promotions, the biggest story is about a woman who got home from work early by hitting all green lights, and the city is only expanding upwards, not outwards. The Doctor and his companions stop in a café, where the Doctor asks a woman what the planet’s name is; scandalised, the woman claims that this is Colony World 4378976.Delta-Four, and that he can’t trick her into saying anything different. The manager then kicks the Doctor out of the café for disturbing the other patrons. The Doctor books a room at a hotel by using his psychic paper as a credit card, having realised that the people of the city are polluting their atmosphere by burning fossil fuels and that the television only broadcasts news and reality TV, no fiction of any kind. Presumably the colony’s rulers have deprived their citizens of fiction in order to keep them under control by removing their ability to dream of something better, and the Doctor vows to put a stop to it.
While Rose and Jack catch up on their sleep, the Doctor heads out to explore the city. Rose is woken by the sound of sirens, and when she leaves the room to investigate, she runs into a panic-stricken young man named Domnic Allen who is carrying crudely-drawn comic books about flesh-eating zombies. Domnic claims that he and his friends got together to swap fiction, but were raided by the police; Domnic managed to get away, but he’s convinced that he can hear the police coming for him. Rose isn’t sure whether the noises she hears are just in her imagination, and she thus invites Domnic back into her room to tell his story. Domnic explains that he was inspired to write by a pirate TV station called Static, run by a renegade named Hal Gryden; unlike the other stations, Static broadcasts fictional programming, and Domnic dreams of getting his own stories on air, though he has no idea how to go about it. Jack suggests that Domnic learn how to sell himself, and starts to spin a tale of his old con-man days -- but the story sends Domnic into a panic, as Jack is stretching fiction to encompass lies. Domnic suddenly becomes convinced that Rose and Jack are undercover cops, trying to trick him so that they can take him to the Home for the Cognitively Disconnected, the Big White House, and burn out his brain so he’ll never dream again. Before Jack can stop him, Domnic throws himself out of the 60-storey window to escape... and barely manages to catch the anti-grav fire escape, which lowers him safely to the street.
Out on the streets, Inspector Kimmi Walker pursues one of Domnic’s fellow fiction geeks through a nearby apartment building into an elderly couple’s flat, where, when cornered, he claims to be Alador Dragonheart of Etroria. The disgusted Waller places him under arrest, but is even more appalled when the terrified old woman pleads for mercy, apparently believing that Waller intends to shake her down for bribe -- which is of course a fiction, since Waller is a policewoman. The woman has been watching Static and has believed the lies spread by Hal Gryden, and Waller thus arrests her and her husband as well. When she emerges from the apartment building, she finds the Doctor studying her motorbike; he claims to be a government inspector, and she promptly tries to arrest him, since there is no government on Colony World 4378976.Delta-Four. The Doctor smoothly switches gears, produces his psychic paper and “reminds” her that he actually claimed to be a researcher for Channel 8 News who is preparing to produce a documentary on thought crime. She buys this claim and allows the Doctor to ride along with her on her beat.
The Doctor watches with interest as Waller answers a call from her superior, Steel, on her wrist vid-com. Apparently, patrols have a fix on Hal Gryden’s current location, and Waller rushes off to be in on the arrest. She has seen what fiction like Gryden’s can lead to: fiction is the first step on the road to fantasy, and soon its victims become incapable of distinguishing between reality and their imaginations. However, Gryden’s signal is lost before the patrols can move in on him. Waller then investigates the sound of sirens from the financial district, where a fantasy-crazy office worker is holding his fellow bankers hostage and threatening to blow the building sky-high. Already, his panic-stricken hostages are going fantasy-crazy themselves, fearing that the criminal is armed with a Death Ray with which he intends to take over the Universe.
The Doctor tries to calm down the panic-stricken criminal, Arno Finch, but Waller intervenes when the Doctor asks Finch what he wants; this is a dangerous question, as it encourages people to imagine something different from what they see before them. Finch insists that he’s seen game shows on Static in which people are given cash prizes and vacations away from this planet, but when Waller reminds him that this is all fiction and lies, he panics and detonates his bomb. For a moment, Waller sees the ballroom go up in flames before her eyes, and is unsure whether this has really happened or whether it’s just in her imagination -- but then the Doctor steps forward, picks up the “detonator” and reveals that it’s just a TV remote control. Furious with herself for succumbing to Finch’s fantasies, Waller places Finch under arrest and has him sent to the Home for the Cognitively Disconnected -- and the Doctor insists upon following him to see what happens next, as he’s realised that the situation on this planet is more complex than he’d first thought.
Waller takes the Doctor to the “Big White House,” where the Doctor tells the duty nurse, Cal Tyko, that he wants to show people the reality of things so that people will believe the evidence of their own eyes and not Hal Gryden’s lies. Tyko thus shows the Doctor some of his patients, including a man who kept his dead grandmother in their flat for six weeks because he believed that she was still alive. Tyko explains that people begin to lose the ability to distinguish between fantasy and reality when they hit puberty, but children are still taught to control their dreams in order to prepare them for adulthood; nevertheless, violent crime has been rising ever since Static hit the airwaves. The Doctor and Waller watch as Tyko questions Finch after giving him an injection that will paralyse the right hemisphere of his brain, the side that dreams.
The Doctor notices that Waller has kept her helmet on while inside the Big White House, and deliberately manoeuvres her into a position where she must either remove her helmet or lie about her reasons for keeping it on. She is forced to admit that, when she was a teenager, she was sent to the House for sixteen months after her fantasies about monsters got out of control; ever since then, she’s devoted her life to protecting others from their own nightmares. Tyko insists that his people have good cause to fear the big bad wolf, but the Doctor then shakes him by pointing out that he’s just used a metaphor. The Doctor now understands that fiction is indeed dangerous on this world, but the people have been treating the symptoms instead of the cause for so long that they can’t imagine living any differently. The Doctor, however, has his own ideas. Before leaving to go off-shift, Waller admits to the Doctor that the planet’s name was outlawed because it triggered associations and imaginative thoughts in the colonists; however, it was once known as Journey’s End, because, like Waller, this is where the colonists hoped to put past struggles behind them.
As morning dawns, Jack heads out onto the streets to get a feel for life in the colony, and meets a tramp looking for alcohol with which to numb his fantasies that he’s actually a rich businessman. Jack takes pity on the tramp and takes him to a nearby pub for a pint, and over drinks, the tramp tells Jack about Hal Gryden, an embittered businessman whose son committed suicide in the Big White House. Jack decides to introduce fantasy back into the world by stimulating people’s imaginations, and the tramp accompanies him from pub to pub as Jack spreads tall tales about his own life. The tramp warns Jack that the police will soon come looking for him, and helps him to flee when this happens, since he may now be regarded as an accessory after the fiction. After leading Jack to an overgrown area of the city, however, he reveals that he is Hal Gryden, and that Jack has passed his test.
The tramp leads Jack to a run-down warehouse at the edge of town, claiming that this is where Static’s studios are hidden; the special effects and sets are still somewhat shoddy, but it’s the quality of storytelling that matters. In passing, he also claims that this planet was once named Oneiros, after the carriers of dreams in Greek mythology -- the role that Gryden himself now fills. Oddly, the warehouse seems deserted, apart from discarded children’s toys, and as Jack follows his new friend around in an attempt to find the studios, the police storm the warehouse, presumably alerted by someone who saw Jack enter the building. Jack holds off the police while the panic-stricken tramp leads him to the studio entrance... but when they break through the door, they find only another empty room in the deserted warehouse. Jack realises too late that the tramp was only deluding himself into believing that he was Hal Gryden, and is forced to surrender to the police as the panic-stricken tramp begs them not to take him back to the Big White House.
Rose wakes to find herself alone in the hotel room, but she catches a vague glimpse of a broadcast just fading off the TV -- a man who is telling people that it’s good to dream, even bad dreams, because they allow you to fight monsters and improve yourself without actually placing yourself in real danger. Rose tracks down Domnic on her own to learn more about the fictional underground, but begins to get the feeling that she’s being watched and catches glimpses of the flesh-eating zombies from Domnic’s comic lurking in the shadows. Domnic is hiding out in a café near his house, and when he sees Rose, he apologises for running away and claims that he’s seen Hal Gryden calling on the people of this world to rise up against their oppressors. However, Rose then sees the zombies closing in on her and Domnic, and realises that the people around her can’t see them -- which must mean that the broadcasts from Static have opened up her mind to the reality of things. She fights off the zombies and drags Domnic to safety, but he stops running when he realises that he and Rose aren’t running from the same thing. He’d thought that they were being chased by the police, but now that he’s seen Rose swinging at thin air, convinced that she’s fighting off flesh-eating zombies, he’s realised that in fact Rose has gone fantasy-crazy.
Rose insists that the Doctor can help them fight the zombies, but Domnic points out that she’s claiming to travel through time and space with an alien who saved her life from walking shop window dummies, which is hardly plausible. In order to prove that she’s telling the truth, Rose uses her cell phone to call her mother back in the 21st century; however, once Jackie realises who’s calling, she begins to lecture her daughter about how cruelly she treated Mickey in Cardiff. This cold dose of reality wakes Rose up, and she realises that the zombies, though they seemed real at the time, were just in her imagination. She and Domnic return to the hotel to calm down, and on the way, Domnic tells Rose that this planet was once called Discovery, by pioneers like Domnic who were looking for something extraordinary.
While Rose tries to calm herself down, Domnic switches on the television and sees that the ordinary news broadcasts are now discussing Hal Gryden. Until now, they’d tried to ignore him in the hope that he’d go away, but now they’ve been forced to address the growing civil unrest and bring Gryden out into the open. Now more and more people will become aware of him, and the revolution can begin. Delighted, Domnic surfs the channels until he finds Static, broadcasting a sitcom based around the premise that the people of this colony are stupid sheep who believe everything the media tells him without thinking for themselves. Glued to the TV set, Domnic fails to notice what’s happening in the room until the Doctor arrives -- and finds a note from Rose claiming that she left some time ago, apparently with the Doctor.
Jack is taken to the Big White House by two hostile policemen, one of whom now fears for his sister’s sanity, since she was in one of the pubs where Jack was spinning his tall tales. Cal Tyko shows Jack a few Rorschach inkblot tests, and Jack, trying to present himself as a model patient, correctly identifies them as random splotches of ink. Tyko allows him to mix with the other patients for a while, and Jack is disturbed to find that many of them are genuinely incapable of distinguishing between fantasy and reality. Tyko then questions Jack again, but doesn’t believe his claim to be a visitor from another world, since nobody has ever visited this planet since the colony was founded. Jack challenges him to let the media follow him into his ship to prove that he’s speaking the truth, but Tyko refuses, claiming that complex truths would be just as confusing as fiction to the people. He concedes that Jack shows extraordinary mental discipline in resisting the pull of fantasy, but just as Jack thinks he’s getting somewhere, Tyko has the orderlies restrain him. Since Jack is not fantasy-crazy, this means that he was fully aware of what he was doing when he perpetrated fiction, and Tyko thus sentences him to immediate brain surgery. The visualisation centres in the right side of his brain will be burnt out and severed from the linguistic centres in his left hemisphere, and Jack will never be able to dream again.
Rose is out on the streets, believing that the Doctor is right by her side -- although for some reason none of the cab drivers seem to notice him waving them down. The Doctor waits for Rose to work out the truth about this planet herself before explaining it; the media is in control, just like the thing on Satellite Five whose name he can’t seem to remember at the moment. To fight back, they must make contact with the dissidents at the Big White House. However, when they arrive at their destination, the driver ignores the Doctor’s psychic paper and demands money from Rose, who has none. She and the Doctor are forced to flee when the furious cab driver tries to take her back to the depot to give her a hard dose of reality. The Doctor tries to help Rose climb over the wall surrounding the Big White House, but she keeps slipping out of his grasp and then runs into a force field which he failed to warn her about. She thus decides to walk straight through the front gate by claiming that she’s brought the Doctor in for treatment, and the guard lets her through, as it’s clear that he’s got a genuine delusional case on his hands. Once inside, Rose tries to slip into the main building without attracting attention, but she triggers the intruder alarms and is captured by the orderlies. The Doctor stands by and does nothing as the orderlies restrain Rose and inject her with the contents of a syringe -- and as the injection takes effect, the imaginary Doctor vanishes into thin air.
Back at the hotel, the real Doctor storms out, asking Domnic if he wants to come along; only afterwards does Domnic realise that the Doctor timed the question perfectly, at the very moment when he was ready to say yes. The Doctor leads Domnic out of the city into the jungle, where anything could be lurking, but despite Domnic’s fears, the Doctor seems to have no trouble telling what’s real and what’s imaginary. However, when they arrive at a small blue box and the Doctor opens it up to reveal a gigantic control room, Domnic concludes that this is just a dream after all. He follows the Doctor into his ship, waiting to wake up, and makes no protest when the Doctor leads him to an operating theatre, sits him in a strange chair and fits a headset onto his head. The Doctor runs a series of tests until Domnic feels something like an electric jolt pass through his entire body, and then takes Domnic out into the jungle and tells him to imagine the zombies from his comic. Despite himself, Domnic does so, but realises that the zombies he’s seeing in his head don’t seem as real as they once did. The Doctor explains that the planet’s atmosphere is full of micro-organisms that feed off electrical activity; the Doctor has temporarily driven them out of Domnic’s brain, and until they return, he can safely dream of bigger and better things without getting lost in his imagination.
At the Big White House, orderlies wheel Jack into an operating theatre where a surgeon prepares to burn out his brain with a wire. However, just as the procedure is about to begin, Rose breaks into the hospital, and the surgeon sends the orderlies to deal with the security breach. While his back is turned, Jack manages to pull one hand free of his restraints, untie himself and overpower the surgeon and the two remaining orderlies. He plans at first to escape using the orderlies’ keycards, but changes his mind when he sees Rose being dragged off to a padded cell. He breaks into her room, but must hide behind the door when Tyko pops by to check on his new patient -- and since Tyko doesn’t notice Jack, he doesn’t respond to his presence, and Rose concludes that she’s just imagining him. She thus refuses to speak to Jack when Tyko has left the room, but when he correctly pronounces the name of the Mighty Jagrafess of the Holy Hadrojassic Maxarodenfoe, something the imaginary Doctor was unable to do, she realises that he is real after all. She and Jack now understand that the people of this world are genuinely incapable of telling fantasy from reality, and that the laws against fiction really are there to protect them -- but they also know that the Big White House is a terrible overreaction to the problem, and whatever the truth, the House’s victims don’t deserve what’s being done to them. Jack and Rose thus decide to release their fellow patients and show the world the truth about what happens here.
Inspector Waller dreams of the imaginary monsters that got her sent to the Big White House when she was a teenager, and wakes to find that the rest of the world has gone fantasy-crazy. On her television, she sees Hal Gryden exhorting his followers to rise up and drag the world down into meaningless anarchy and chaos. Though not officially on duty, she dons her uniform and is pleased when she receives a call from Steel ordering her into action. However, the chaos continues to spread, as ordinary citizens respond to imaginary threats and make the situation worse. She then receives word that the patients have taken over the Home for the Cognitively Disconnected, and rushes to help, only to find that she’s the senior officer on the scene. Captain Jack contacts her and explains that his only demands are that the Home stop treating “patients” who are not truly sick; they may be obeying the law, but it’s time for the law to change. The Doctor then arrives with Domnic, whom he introduces as his research assistant, and offers to enter the Home, speak with Jack and find out what’s going on. Out of her depth, Waller agrees to let the Doctor enter only after he promises her that he will take full responsibility for the risk.
Inside the Home, Jack tells the Doctor that 220 sane patients are manning the barricades. The Doctor checks on Rose, and assures her that she’s not going mad; the micro-organisms in the planet’s atmosphere have been feeding off the electrical activity in her brain’s right hemisphere and feeding back the surplus, overwhelming the human brain’s ability to distinguish between dreams and reality. The Doctor leaves Rose with the cheery thought that all of the wit and quick thinking displayed by the Doctor in her imagination was in fact her own. He then visits Tyko, reveals the truth and tells him how to cure his patients without lobotomising, and leaves Tyko to decide for himself whether to believe him or not. The Doctor then addresses the remaining patients and reveals that there is no such person as Hal Gryden; he is a fiction, a mass hallucination dreamed up by people with no other outlet for their suppressed desires. Now that he’s become public, everyone believes in him, and the people of the city are answering his call to rise up against those who have oppressed them -- but there are no such oppressors, and the colony will tear itself apart unless the Doctor can stop it.
The Doctor uses the Big White House’s computers to hack into the old colonial government systems, which were never shut down, and uses them to override every media signal on the planet and broadcast a message to the colonists -- claiming that he is the real Hal Gryden, and calling for an end to the violence. Now, when people think of Hal Gryden, they will be remembering him with their left hemispheres rather than dreaming of him with their right, and the riots should begin to calm down. However, when the Doctor identifies himself as Gryden, the police storm the Big White House to arrest him, led by the furious Waller. Jack, Rose and Domnic help to hold the police back, but some of the patients go fantasy-crazy in the thick of the fighting, as do some of the police. Finally, the police fight their way through to the Doctor’s makeshift broadcast booth, where Waller tries to place the Doctor under arrest; however, he calmly requests that she contact her superiors and find out what they really think of her actions. She does so, and to her satisfaction, hears Steel confirming that she’s done the right thing -- but then the other police turn their guns on Waller. Her wrist communicator is broken, and always has been; there is no “Steel,” and Waller isn’t a real policewoman, but a woman who never really recovered from her nervous breakdown and lost herself in fantasies of helping people to overcome their own imaginations. The camera broadcasts everything to the people of the colony, and the riots come to an end.
The Doctor and his friends surrender voluntarily, and Tyko goes public with the news about the micro-organisms. The colony’s top scientists immediately develop a cure, but have to start over again when they discover that they’ve only imagined their success. Jack, Rose and Domnic are eventually released from the Big White House, and the Doctor escapes of his own accord; even Waller is released after the head of the police admits that she has a better arrest record than any real officers. Eventually, a real cure is found, and life on the colony begins to change for the better. The colonists discover that the planet’s name is in fact Arkannis Major, which doesn’t really mean much of anything. Fantasy and fiction become more commonplace as people learn to tell the difference, and eventually, a new science-fiction programme appears on the colony’s new media networks -- the adventures of a mysterious traveller in time and space, known only as Hal Gryden.