It's the first day for a new teacher at Duffry Vale High School, a new instructor who calls himself John Smith who knows that something's wrong with this school. Led to the school by Mickey, who's been following mysterious UFO sightings and strange staff changes at the school, the Doctor has now come to Duffry Vale to find out why, led by nothing other than his curiosity. Rose is there, too, having joined the kitchen staff for a job she is thoroughly unhappy with and finds bizarre, especially the incident with a barrel full of viscous, caustic yellow goo. But all remains quiet, until the headmaster, Finch - a sinister man with beady eyes who came to the school in recent months and replaced most of the staff with his own people - introduces a journalist from the Times who's come to the school to write a story about him... a woman named Sarah Jane Smith.
The Doctor, caught off guard upon the sight of one of his dearest friends from his long days of travel within the TARDIS, at first doesn't let on about his identity; instead, he plays along as the new teacher, sounding Sarah Jane out about her real motivation for coming here, which is as he suspects: the same reason he's here. True to form, later that evening, as the Doctor, Mickey and Rose have returned to the school to do a bit of snooping, Sarah Jane has also broken into the school, and discovers the presence of the TARDIS. At that moment, she is reunited with the man who abandoned her so many years before, but who she has remained eternally fond of. Mickey, meanwhile, discovers a closet full of dehydrated rats, while on top of the school, Finch and a bat-like creature watch the four with eagle eyes. When the Doctor suggests that they analyze the liquid Rose discovered in the kitchen, Sarah brings him to the boot of her car, where she reveals the broken-down, but possibly still functional, robot dog, K9.
While Mickey and Rose remain curious about the Doctor's relationship with Sarah Jane, the two reminisce about their traveling days together. The Doctor succeeds in repairing K9, who tells him the goo is Krillitane oil, a nasty substance that heralds the presence of the alien Krillitanes, beings who have evolved by taking on the characteristics of other species. Somehow, the Krillitanes here - Finch being their leader - are doing something with the oil to the children of Duffry Vale High School, but Finch himself promises the Doctor that it's not evil, just impressive on a galactic scale. Meanwhile, Rose and Sarah Jane have words - taking an immediate dislike to each other - while Mickey contemplates his role in their group, feeling consigned to the same status as K9, the 'metal dog' role, always on the sidelines.
Later, Finch offers the Doctor the chance to take control of his destiny after the Time Lord discovers the secret about the project the Krillitanes are brainwashing the children into completing: they're trying to crack the Scasis Paradigm, the universal theory that controls the building blocks of the universe. With the 'godmaker' powers unleashed, the Doctor would in essence be able to recreate the Time Lords from scratch and run the universe. It is an opportunity the Doctor decides to pass, which sets the Krillitanes on the loose. With the aid of a young student who's escaped the Krillitane mind control devices, Mickey crashes his car into the building to rescue everyone, but they, the Doctor, Rose and Sarah Jane are stranded inside the cafeteria....
...until K9 arrives on the scene, using his rapidly-depleting laser to ward the Krillitanes off.
The Doctor concocts a plan to deal with the invaders, while Mickey helps free the children by pulling the plug on the computers. The Doctor says goodbye to K9 for one more time, before evacuating the building. In the kitchen, the Krillitanes converge on K9, before he's able to stun them by blasting the vat of oil - exposing them to the viscous goo which has become highly toxic to them - and then blowing up the entire room, taking himself in the process.
Sarah comes to see the Doctor and Rose off within the TARDIS; having made peace with Rose, with whom she now shares a bond as friends and confidantes of the Doctor, Sarah turns them down on his offer to join them. But Mickey asks to go as well; he wants to shed his place as the man on the other end of the phone, and instead wants to see the universe. While Rose and Mickey prepare to leave in the TARDIS, the Doctor says one last goodbye to Sarah Jane Smith, who is finally able to put the past, and her trip beyond time and space, behind her. But the Doctor has left her a gift: a fully rebuilt K9 whom she spots as the TARDIS slowly fades away.
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