Kira is intrigued when Quark presents her with an earring he claims was delivered from Cardassia IV. She immediately recognizes the earring as that of Li Nalas, who according to legend is the greatest Bajoran resistance fighter ever. Li has been missing and presumed dead, but the earring indicates that he is alive, and Kira believes it was smuggled out as a cry for help. She asks Sisko for a Runabout to rescue Li, telling him that Li is exactly the sort of leader the increasingly factionalized Bajoran people need. Sisko is skeptical about the dangerous mission, but promises to think about it, when Odo and O'Brien approach Sisko with another problem. Graffiti bearing the insignia of "The Circle," an extremist group that wants to rid Bajor of all non-Bajorans, has appeared around the station. Sisko is troubled by this reminder that tensions on Bajor are definitely growing.
With this in mind, and with encouragement from Dax, Sisko agrees to let Kira have the Runabout on one condition — O'Brien must accompany her on her mission into Cardassian territory. At first, Kira objects, worried that the presence of a Federation officer will only complicate things. However, Sisko is unwilling to bend, so Kira reluctantly agrees and the two head off.
After near-detection by the Cardassian forces, Kira and O'Brien land inside a prison camp where Bajorans break rocks in the sun. Kira flirts with an overseer in order to get inside the prison forcefield, then she and O'Brien make a surprise assault and get to the prisoners. Li is confused, unsure why these strangers have come for him. His friend Borum reveals that he smuggled the earring out in order to get Li rescued. The group prepares to leave as Cardassian guards come at them with phasers blazing. Li is hit, and the group makes the grim realization that they cannot escape with all of the other prisoners. Borum orders Kira to take Li back to Bajor and insists that he and three other prisoners will hold off the Cardassian troops. Reluctantly, Kira allows Borum and the others to sacrifice themselves in order to save Li.
Back on the station, Li is given medical attention while Kira inadvertently steps in on a message from Cardassian leader Gul Dukat. She is shocked to hear Dukat apologize for the existence of the prison camp, and is skeptical when he announces that all of the remaining prisoners will be released. Sisko also has trouble believing Dukat's words, but encourages Kira to be pleased with what has been achieved. The sudden arrival of Li has caused a tremendous commotion on the station, as Bajorans openly stare at him in awe. Li, however, seems strangely uncomfortable with the attention. He politely stands by while Minister Jaro from Bajor makes a speech publicly welcoming him home, and only relaxes when Sisko finally escorts him to his quarters. There, Sisko hints at the trouble on Bajor and asks Li for help in bringing stability to the planet. Meanwhile, at the counter of his closed bar, Quark is attacked by three masked, hulking figures who force him to the floor and burn his flesh with a sort of branding iron.
While Dr. Bashir aids Quark, Li is told that Quark's assailants are members of The Circle. Li is shocked that Bajorans have done such a thing, and Sisko explains that many Bajorans are turning to The Circle because they have grown impatient with their government. Kira adds that the Bajorans need a leader who will speak out against extremist groups, at which point all eyes turn to Li. He, however, wants no part of it. A short while afterward, the Bajoran hero Is caught trying to secretly leave the station for the faraway Gamma Quadrant.
Forced to explain himself, Li painfully reveals that the bravery he is so famous for is based entirely on rumors. He killed an unarmed, unclothed Cardassian, and when the Bajorans learned that this dead Cardassian was a great fighter, Li's encounter — and everything he did that followed — grew to reach mythic proportions. Because the stories that made him a legend are false, Li feels unworthy of leading the Bajorans. But Sisko disagrees. He explains that the Bajoran people need a legend, and that they look to Li as a symbol of what is best in themselves. Realizing that Sisko is right, Li agrees to assume whatever role is needed, which soon results in a surprising development. Minister Jaro announces that Li has been named Bajoran Liaison Officer to Deep Space Nine — the position currently held by Kira. Over Sisko's objections, Jaro states that Kira has been dropped from the station and has been called back to Bajor.
(One of the great episodes of season two!)