When the TARDIS lands on a volcanic island, the time travellers are kidnapped and taken through a passageway to the lost city of Atlantis. While Ben and Jamie are sent to toil in the mines, Polly is fated to undergo an operation to turn her into a water-breathing Fish Person. Meanwhile, the Doctor meets the famous scientist Professor Zaroff, who has convinced the Atlanteans that he can raise their city back above the waves. But the Doctor realises that Zaroff is insane and, if he isn't stopped, his plan to drain the ocean's waters into the planet's core will doom the Earth.

Around the start of 1966, veteran writer Geoffrey Orme began working on a Doctor Who storyline called “The Evil Eye”. This was eventually rejected by story editor Gerry Davis on April 4th, but the two men continued to discuss ideas and, on August 16th, Orme was commissioned to write a new serial entitled “Under The Sea”. This narrative was set in Atlantis, a lost city referenced in two dialogues written by the philosopher Plato; although Atlantis was likely allegorical in nature, it had nonetheless endured in popular folklore. It was planned that “Under The Sea” would be the second adventure to feature Patrick Troughton's new Doctor, immediately following The Power Of The Daleks. The director originally assigned to it was Hugh David. However, David complained that the story would be impossible to make on a standard Doctor Who budget. On October 12th, it was decided that David would instead direct The Highlanders, previously the third Troughton serial, which would now change places in the production order with “Under The Sea”.

Soon thereafter, “Under The Sea” was dropped from the schedules entirely, although Orme would continue to make revisions. Its spot was taken by “The Imps”, commissioned on October 17th from William Emms, who had written the previous season's Galaxy 4. The director assigned to “The Imps” was Julia Smith, who had been responsible for The Smugglers at the end of the previous recording block. Emms worked quickly on his scripts, but fell ill during mid-November and was unable to complete necessary rewrites to the satisfaction of the production team. With recording due to start in the middle of December, it was decided to resurrect Orme's serial, which would now be made before “The Imps”. The Atlantis adventure was renamed “The Fish People”, having also borne the title “Atlanta”.

Jamie generally shared dialogue originally written for Ben or Polly

A key change that now had to be made to Orme's scripts was the addition of Jamie McCrimmon, a character introduced in The Highlanders who was made a series regular in late November. With little time to restructure the adventure to accommodate an extra companion, Jamie generally shared dialogue originally written for Ben or Polly. Some details of the storyline were altered or deleted: the cause of Zaroff's insanity was intended to be the death of his wife and mother in an automobile accident, while Ara's role was expanded by merging her with another character called Ebon (and it was likewise thought that Ara might replace the carpet seller, Nola, in Episode Three). Zaroff was at one point assisted by a female scientist called Steen. In late November, the serial's title was finalised as The Underwater Menace.

On December 9th, a new title sequence was recorded for Doctor Who by graphics designer Bernard Lodge, the first since the programme's debut three years earlier. Although consideration was given to introducing it with The Underwater Menace, this was eventually delayed for two serials until The Macra Terror. It was around this time that producer Innes Lloyd decided to write Ben and Polly out of Doctor Who. He and Davis felt that Polly was not working well, and they did not believe that Ben would succeed without her. Additionally, they found that Jamie was proving to be the more interesting of the three companions.

The Underwater Menace was accorded two days of location filming, on December 12th and 13th. The venue was Winspit Quarry, near Worth Matravers in Dorset, which posed as the volcanic island. Now that he would be continuing on Doctor Who, Frazer Hines decided to begin modulating the Highland lilt he had employed in his debut story, achieving a more conventional Scots accent. From December 14th to 16th, filming took place at the BBC Television Film Studios in Ealing, London. This included model shots, as well as material involving the Fish People; although the facility's water tank was used (and was also required for Zaroff's death scene), many of the “swimming” shots were actually performed in mid-air using Kirby wires.

The last studio recording for The Highlanders was followed by a week off over Christmas, pushing back the start of work on The Underwater Menace to January 7th, 1967. This meant that Doctor Who was now being taped just one week ahead of transmission, a precarious situation which afforded the production team little room for error. As usual, The Underwater Menace was recorded on consecutive Saturdays at Riverside Studio 1 in Hammersmith, London. Episode Four, recorded on January 28th, was the final episode to feature the Doctor's Paris beau hat. The more overtly clownish elements of Troughton's costume had been gradually reined in since his debut in The Power Of The Daleks. Likewise, The Underwater Menace was the last story to emphasise the new Doctor's fondness for disguise.

The broadcast of Episode One on January 14th sparked an angry letter the following Monday from Mrs N Safford, of the National Society for the Welfare of Children in Hospitals. Safford was concerned that the sight of Polly undergoing an operation to turn her into a Fish Person would scare children with upcoming surgeries, who might become convinced that they would wake up to find themselves transformed into monsters. Lloyd refuted this argument, noting that the fantastical nature of The Underwater Menace made it clear to viewers that the story's events were not realistic.

• Doctor Who Magazine #209, 16th February 1994, “Archive: The Underwater Menace” by Andrew Pixley, Marvel Comics UK Ltd.
• Doctor Who Magazine Special Edition #4, 4th June 2003, “Good Vibrations” by Andrew Pixley, Panini Publishing Ltd.
• Doctor Who: The Complete History #9, 2016, “Story 32: The Underwater Menace”, edited by John Ainsworth, Hachette Partworks Ltd.
• Doctor Who: The Handbook: The Second Doctor by David J Howe, Mark Stammers and Stephen James Walker (1997), Virgin Publishing.
• Doctor Who: The Sixties by David J Howe, Mark Stammers and Stephen James Walker (1992), Virgin Publishing.