The BBC got this wrong. The storyline is confusing, make no mistake, but watching the Special features, this was always meant to be a four part, no three part episode. The time they lost would have gone a long way to clarifying exactly what was going on.
Don't get me wrong.
I'm a Doctor Who fan. In fact, Sylvester McCoy is one of my favourite Doctor's ever, and Ace is the best companion, fullstop. But the only way you will understand exactly what happened is by watching what Andrew Cartmel says in the Bonus features section.
Still, overall, it was very good. Just don't let this be the first episode of Doctor Who you ever watch.