A group of hooded monks travels across the Scottish moors and enters the Torchwood Estate, belonging to Sir Robert MacLeish. There, Father Angelo confronts the Steward and his men, demanding possession of the house. When the Steward refuses, Father Angelo beats him into submission with a quarterstaff. The monks remove their cassocks, revealing red robes, and exhibiting incredible martial skill they make short work of the rest of the men. They take over the house, chaining everyone they find into the cellar, including Lady Isobel MacLeish. The monks then carry a covered cage into the cellar. When the Steward asks what is beneath the canvas, Father Angelo unveils it. Seeing what is inside, Isobel screams…

In the TARDIS, the Doctor offers to take Rose to Sheffield in 1979 to see Ian Dury in concert. However, after the usual bumpy ride, they exit the police box to find themselves surrounded by armed soldiers on horseback. From their accents and attire, the Doctor realises that they have arrived in 1879 Scotland instead. Using psychic paper and affecting a Scottish accent, he convinces Captain Reynolds that he is Dr James McCrimmon, "of the township of Balamory" and had studied under Dr Bell. An authoritative voice issues from the carriage the soldiers are escorting, asking the Doctor and Rose to approach. When they see who is within, the Doctor introduces Rose to Her Majesty, Queen Victoria, who is on her way to Balmoral Castle. When Victoria sees the psychic paper, she notes that it says that the Lord Provost has appointed the Doctor as her protector. The royal carriage is travelling by road because a fallen tree has blocked the train line to Aberdeen, and Victoria suspects an assassination attempt. The two travellers are allowed to accompany the carriage on to the Torchwood Estate, where the Queen plans to spend the night.

Sir Robert watches from the window, with Father Angelo (disguised as a servant) behind him. Sir Robert goes to meet Victoria, but despite hinting that all is not right, the Queen insists on staying, as the estate was a favourite place of her late consort, Prince Albert, who used to visit Sir Robert's father. They go into the manor, with Reynolds deploying his men to guard the estate and carrying a small leather box which he carries inside and locks in a safe. In the cellar, the captive in the cage, which appears to be a hooded man, indicates to the other prisoners to be silent.

Sir Robert shows the Queen, Doctor and Rose the Observatory, which contains a telescope designed by his father. Examining the telescope, the Doctor notices that it has too many prisms, causing too much magnification for simple stargazing. Sir Robert says that he knows little of his father's rather eccentric work. Victoria mentions that Sir Robert's father was a polymath, equally versed in science and folklore, and that Albert was fascinated by local stories of a wolf. Before Sir Robert can tell the tale, however, Father Angelo interrupts, offering to take the guests to their rooms to prepare for dinner.

While Rose searches through the wardrobes for more appropriate attire, the disguised monks offer the soldiers drugged drinks, which knock them unconscious. Rose discovers a frightened servant girl, Flora, hidden in one of the cupboards, and Flora tells Rose of what has happened. However, when they leave the room to find the Doctor, they are captured by monks, taken to the cellar and are chained with the others.

At the dinner table, Sir Robert tells them the story of how, for the past 300 years, livestock would be found ripped apart every full moon. Once a generation, a boy would also vanish, and there would be sightings of a werewolf. In the cellar, Rose notices the caged man's alien-looking eyes, and asks him what planet he is from. The man is amused that he has actually encountered intelligence, and tells Rose that while the human body he wears was born ten miles away, a boy stolen away by the Brethren which it then possessed, he comes from much further away. Rose offers to take the alien intelligence back home, but the alien does not wish to leave. He intends to bite Queen Victoria, migrate into her body and begin the Empire of the Wolf. He then notices that Rose has "something of the wolf" about her, but while she has burned like the sun, all he requires is the Moon.

Upstairs, Sir Robert relates that his father believed the story as fact, and even claimed to have communicated with the beast and learned its purpose. However, the Brethren of a monastery in St. Catherine's Glen opposed his investigations; Sir Robert asks, what if the monks had turned from God and started worshipping the wolf? The Doctor sees Father Angelo go and face the full moon through the window, chanting in Latin, "lupus deus est" — "The wolf is God" — and realises that the enemy is here.

The monks throw open the cellar doors, and moonlight streams into the Host's cage. Throwing off his robe, he begins a horrifying transformation. Rose rallies the other prisoners, telling them not to look but pull on the chains. Sir Robert apologises to the Queen for his betrayal, explaining that they were holding his wife. The Doctor demands to know where Rose is, but Father Angelo ignores him, continuing his chanting. The Doctor and Sir Robert rush down to the cellar, leaving the Queen while Reynolds trains his pistol on Father Angelo, asking him what his goals are. Father Angelo replies, "the throne", and swiftly disarms Reynolds.

The Doctor and Sir Robert reach the cellar just as Rose and the other prisoners manages to break their chains, but the Host has finished his transformation, and is breaking out of the cage. The others run out of the cellar, with the Doctor transfixed at the terrific sight of the werewolf until the last second. He seals the door with his sonic screwdriver as the werewolf howls at the moon. Above, Victoria surmises correctly that the monks had sabotaged the train tracks to bring her here. However, she is not unprepared, and threatens Father Angelo with her own revolver. He sneers at her sceptically, calling her a "woman". The Queen retorts, "The correct form of address is 'Your Majesty'!" and fires.

The women are told to leave the house through the kitchen, while the Steward organises his men, taking firearms from the cupboards. The werewolf has broken through the sealed door, but is driven back momentarily by rifle fire. The women find the kitchen door locked, and the courtyard beyond guarded by monks with rifles. The Doctor tells the men they should retreat upstairs. The Steward says that nothing could have lived through the rifle barrage — and is promptly grabbed by the werewolf and killed. Sir Robert, Rose and the Doctor run.

The werewolf slaughters the remaining men, and makes it way to the kitchen, where Lady Isobel and the other women are huddling in fear. However, instead of killing them, it sniffs the air and leaves. Meanwhile, Victoria retrieves the mysterious box from the safe, and meets up with Sir Robert, Rose and the Doctor. However, as they try to escape through the windows, the monks outside open fire. The four run upstairs, pursued by the werewolf. They meet Reynolds, who after confirming that Victoria has the contents of the box, says he will buy them time until they can get away. He fires at the werewolf, but is quickly torn apart as the others enter the Library and barricade the doors.

However, the werewolf does not try to break through. The Doctor wonders what it is about the room that is preventing its entry. Victoria demands to know what the creature is, and why the Doctor has lost his Scottish accent. The Doctor tries to explain, but she will have none of it, declaring angrily that this is not her world.

In the kitchen, Lady Isobel notices that the monks are wearing mistletoe around their necks; that is why the werewolf does not attack them. She then notices sprigs of mistletoe scattered on the kitchen floor, and orders the other women to gather the scraps up. In the Library, the Doctor notices wooden decorations on the doors carved into the shape of mistletoe. He then realises that the walls are varnished with viscum album — oil of mistletoe. The werewolf is allergic to it, or the monks had trained it to be to control it, and Sir Robert's father knew this. Sir Robert laments that they do not have an actual weapon against it, but the Doctor points out they have the greatest arsenal available: the Library itself.

Lady Isobel and the women cook up the mistletoe into a broth, while upstairs the others look through the books. They discover an account of something falling to Earth in 1540, near the monastery. The Doctor theorises that perhaps only a single cell survived, passing itself from host to host while it grew stronger with each generation. Now it wants to establish an empire, advancing technology and building starships and missiles fueled by coal and driven by steam, laying waste to history. Victoria breaks in at this point, telling Sir Robert that she would rather die than let herself be infected, but asks him to find a place of safekeeping for something more precious. She reveals what was in the box: the Koh-i-Noor diamond. The Queen had been transporting it to the royal jewellers at Hazlehead for it to be recut. The Doctor remembers that Prince Albert kept insisting on having the diamond cut down and was never satisfied with the shape or size.

Suddenly, the Doctor has a brainstorm. The diamond, the telescope, Prince Albert and Sir Robert's father — they are all connected. The Doctor asks, what if the two men were not just exchanging stories, but treated it all as real, and laid a trap for the wolf? Just then, the werewolf crashes through the skylight, forcing the others to flee the Library. The werewolf nearly catches up with Rose, but Lady Isobel appears, throwing the mistletoe broth in the werewolf's face and forcing it away. Sir Robert kisses his wife and tells Isobel to take the women back downstairs, while he and the others climb the stairs to the Observatory.

The Doctor needs time, however, as the doors to the Observatory are not barred against the werewolf — Sir Robert's father intended the wolf to come in. Sir Robert offers to place himself between them and the werewolf, knowing that he will die, but die with honour to make up for his betrayal. He holds the werewolf off with a sword, and as his screams are heard through the door, the Doctor and Rose maneuver the telescope so that it is aligned with the full moon. The telescope is not just a telescope: it is a light chamber, magnifying the Moon's rays. The werewolf may thrive on it, but it can still drown in it.

The werewolf crashes through the door and prepares to slash at Victoria, but the Doctor tosses the diamond on the floor and it catches the light beam, which stabs at the werewolf and suspends it in mid-air. The werewolf momentarily takes human form and asks the Doctor to make it brighter and let it go. The Doctor obliges, and the werewolf form reasserts itself, howls and fades away in the moonbeam. The Doctor notices Victoria's wrist is bleeding, and wonders if the werewolf managed to bite her after all, but the Queen defensively dismisses his concern, saying it was just a splinter from the door.

In the morning, Victoria dubs the two travellers Sir Doctor of TARDIS and Dame Rose of the Powell Estate. Having rewarded them, however, she banishes them from the Empire. The Queen does not know who or what they are, but their world is steeped in terror and blasphemy and she will not have that in hers. The two make their way back to the TARDIS, where the Doctor reflects that it was always a mystery where Victoria (and from her to her children) contracted haemophilia from, and perhaps that was just a Victorian euphemism for lycanthropy.

Back at the Torchwood Estate, Victoria tells Lady Isobel that her husband's sacrifice and the ingenuity of his father will live on. The Queen has seen that Britain has enemies beyond imagination, and proposes to establish an institute to research and fight these enemies: the Torchwood Institute. And if the Doctor returns, Torchwood will be waiting…