As the episode begins, a communiquÃ© from Starfleet interrupts the routine operation of the Enterprise with a priority mission, ordering the Captain of the Enterprise, Jean-Luc Picard, to pick up a member of Starfleet Intelligence.
The operative turns out to be none other than Admiral Eric Pressman (guest star Terry O'Quinn), one time Captain of the Oberth class starship USS Pegasus, Will Riker's first assignment upon graduating from Starfleet Academy. Pressman informs Picard and Riker that intelligence indicates the Romulans found wreckage from the Pegasus in the Devolin system where it had been assumed destroyed twelve years earlier. Starfleet has given Pressman command of the mission with orders to make sure that vital experimental technology which was aboard doesn't fall into Romulan hands. The Enterprise must either recover the ship's remains or destroy them.
Upon arrival at the Devolin system, the Enterprise is challenged by a Romulan Warbird, obviously also there to look for the Pegasus. Both Picard and the Romulan captain make up excuses for their presence in the system, but neither of them appears to be fooled. After dismissing the Romulan captain, Picard orders their own search for the Pegasus to begin.
As the search continues, Riker encounters Pressman in Ten Forward. Riker admits doubts about events aboard the Pegasus, especially those surrounding a certain experiment. Pressman reassures him, adding that if the experiment is recovered, things will pick up where they left off. When Riker objects, Pressman tells him he has orders from Starfleet Intelligence, instructing Riker to conceal the true nature of both the earlier mission and the current one, even from Picard.
Eventually, sensor scan readings indicate the possible presence of the Pegasus in a large fissure deep within an asteroid. Afraid that the Romulans might become suspicious if the Enterprise spends too much time focused on any certain asteroid, Picard decides to move off and return later, and then asks Will to bring the search tracking data by the captain's quarters when he gets off duty.
When Riker does so, Picard reveals that he knows a mutiny occurred aboard the Pegasus shortly before it was destroyed, a fact which was later covered up. He orders Will to describe his version of the events, which Riker does to a point, but Riker reveals he is under orders from Pressman not to discuss the matter. Picard accepts that he will have to remain in the dark, as he cannot countermand an order from an Admiral, but tells Riker that if he discovers Riker's silence jeopardizes the safety of the Enterprise, he will be obligated to "reevaluate the command structure of the ship".
Returning to the asteroid and entering the fissure on Pressman's orders, the Enterprise discovers the Pegasus, sixty five percent of its mass mysteriously amalgamated into the surface of the asteroid. Pressman and Riker beamed into the Engineering section of the Pegasus.
Once there, they discover the bodies of former crewmates and the still intact experimental device responsible for so much intrigue. Riker tells Pressman that he had hoped it had been destroyed. He says he was mistaken in supporting Pressman earlier, and now won't stand idly by. Pressman reminds him that while he doesn't have to help he also can't interfere. In the midst of their argument, something unexpectedly and violently shakes the Pegasus, and the two men quickly return to the Enterprise with the mysterious experiment.
Back aboard, Picard shares the bleak information that the Romulans have sealed them within the asteroid. Sirol, the Romulan Captain, offers them the option of taking asylum aboard his ship, after which they would be repatriated. Pressman rejects this as it would mean handing the Romulans both ships on a silver platter.
Riker offers the solution of using the apparatus that they had just recovered to escape, explaining that the device is an illegal prototype for a phasing Federation cloaking device, allowing passage through solid matter. This infuriates Pressman, who tells Riker that he just ended his career. Picard also is outraged; Pressman and his sponsors have violated the Treaty of Algeron, an agreement signed during the negotiations ending the Romulan wars, which stipulates that the Federation will never develop cloaking technology. Pressman attempts to take command, but finds that no one on the Enterprise is willing to betray Picard.
Geordi La Forge and Data are able to adapt the device to work with the systems of the Enterprise, allowing the ship to pass through the asteroid and emerge near the Warbird. Over Pressman's objections, Picard orders the cloak dropped in front of the Romulan ship and sends a message to the Romulans explaining that the Federation will be contacting the Romulan government with regard to the entire incident shortly.
Picard then has Pressman arrested for violating the treaty; when Riker points out that he must also be placed under arrest, the Captain sternly obliges him as well. As Pressman is led away by security he defiantly says that he has many friends at Starfleet command; Picard grimly observes that Pressman is going to need them.
Shortly thereafter Picard visits Riker in the brig and tells him that Pressman and his cohorts most likely face court-martial proceedings, adding that Riker's role in the affair will be thoroughly investigated and Riker will have some hard questions to answer himself, probably costing him some of the respect he has earned. However, the Captain observes that Riker did eventually make the right choice, noting that as long as Riker can still do that, Picard will be proud to have him as his First Officer. Much to Riker's obvious relief Picard leads him from the cell and the two officers leave the detention area together.