The story begins with the unnamed narrator recounting his dire circumstances as a prisoner in a dark, subterranean dungeon. He reflects on the events that led him and his companion, John Ladeau, into this predicament. Their journey began in Nanking, fueled by rumors of hidden treasures in a mysterious black lamasery located in the Gobi desert. Despite their extensive experience in the East, they were ambushed by local tribesmen and eventually captured.

After surviving a perilous trek through the desert, the duo reached the lamasery only to find it deserted. They stumbled upon a treasure room filled with a vast assortment of coins from various civilizations and periods. While absorbed in their discovery, they were trapped and fell through a false floor into a dark cell, where they were beaten and chained.

Confronted by the head lama, the narrator is offered a chance at freedom if he agrees to undertake a mission to England to retrieve a sacred relic known as the Twig of the Tree of Dreams, which is in the possession of Professor James Dornley. The relic is described as a twig of black jade with crimson jewels, a unique artifact of significant spiritual value.

The lama reveals their extensive spy network and explains that Dornley is heavily guarded and suspicious, making the mission challenging. The narrator is skeptical but agrees to the terms for both his and Ladeau's release. He is given a signet ring, the Seal of Mihiragula, which is crucial for gaining Dornley’s trust.

Before departing, the narrator briefly sees Ladeau, who appears content and unharmed. The lama outlines the conditions: return the Twig within a year, or Ladeau will be killed. The narrator sets out on his journey, escorted by a Tibetan named Bugra, to reach the Great Wall and then travel to England.