Meet our protagonist, Lyra, and her daemon Pantalaimon (the shape-shifting animal that is her soul), or Pan for short. They live at Oxford University's Jordan College, among scholars and other brainy-types. Lyra is an orphan whose parents were killed when she was very young. Her uncle, Lord Asriel, is her guardian. He's a powerful and sometimes scary man involved with politics. For the most part, though, she is cared for by the scholars at Oxford University, where she is also friends with a kitchen boy named Roger.
When the book opens, Lord Asriel has returned from the North, where he has been conducting experiments involving something called Dust. What is Dust? Well, it's something very, very important in the book, and we later learn that the Church thinks Dust is, more or less, the equivalent of original sin. We also find out that Dust develops in children when they get older and their daemon stops shifting and takes on the form of a specific animal.
Back to the opening scene, Lyra figures out that Lord Asriel has been exploring the existence of different worlds – not heaven or hell, but worlds just like this one that exist in another dimensions. During this episode, Lyra also foils a plot by the Master of Jordan College to poison Lord Asriel, and her uncle returns to the North. In an overheard conversation between the Master and the Librarian, it also becomes clear that Lyra is destined to play a part in everything that's unfolding – but what kind of a part? We're still not sure.
The action shifts, and we find out that children are being kidnapped by a group known as the Gobblers. Sure enough, Lyra's own friend Roger disappears, along with Tony Makarios and Billy Costa, one of the gyptian children. (The gyptians are a nomadic clan.)
Around this time, Lyra meets Mrs. Coulter, a dazzling woman with a golden monkey for a daemon. Lyra is taken away to be raised by Mrs. Coulter, but before she leaves Jordan College the Master gives her a golden compass called an alethiometer that once belonged to Lord Asriel. He warns her to keep it away from Mrs. Coulter. In London Lyra is star-struck by Mrs. Coulter's glamour, but we see that the woman has a dark side when her golden monkey daemon is cruel to Pan. Lyra eventually runs away from Mrs. Coulter when it becomes clear that she is connected to those nasty Gobblers.
With the help of the gyptians and Billy Costa's family, Lyra escapes from Mrs. Coulter and heads north to the gathering of the gyptians. She also finds out from Ma Costa that Lord Asriel is actually her father and Mrs. Coulter is her mother. Eeek! This revelation messes with her head a bit, but she deals with it. At the gathering, she meets John Faa and Farder Coram, a gyptian elder who encourages Lyra to learn to read the alethiometer, which she does.
On the journey north, the group stops at the witch consulate, where they learn that the witches have long prophesized the coming of a child like Lyra. This must have something to do with what the Master and the Librarian of Jordan College were talking about in Part 1. During the pit stop, the travelers recruit Lee Scoresby, a hot air balloonist from Texas, to join their group. Lyra and friends also stage the daring rescue of an armored polar bear named Iorek. Iorek is a powerful bear whose soul is his armor. He was exiled from his kingdom after killing another bear in the heat of passion. Lyra helps Iorek get his armor back from the people in the town who have stolen it, and in return, Iorek joins the group on their mission.
The journey north continues. Lyra and Iorek break away from the main group to visit a small town where they find out just what the General Oblation Board (a.k.a. the Gobblers) have been doing to all those children: cutting away their daemons. They find little Tony Makarios, whose daemon Ratter has been replaced by a dried piece of fish. Everyone is horrified, especially Lyra and Pan. Lyra has Tony buried respectfully with a coin given to him to represent his daemon. Shortly after, Lyra is captured and spirited away from her friends by traders on the journey north.
After Lyra's capture, the setting shifts: we're now at the General Oblation Board's camp in the North, where the board cuts the children away from their daemons. The traders have sold Lyra to what looks like a kind of prison/medical camp. She uses a fake name, telling her captors that she's Lizzie Brooks, and pretends to be dim-witted.
Inside, Lyra sees Billy Costa, the gyptian child of Ma Costa, and meets at long last with her friend Roger, the kitchen boy from Oxford. They form a plan to escape. During a fire drill, they run into the witch queen Serafina Pekkala's daemon. Before they can carry out their escape plan, Lyra is caught spying and taken to the silver guillotine used to sever children from their daemons. Mrs. Coulter arrives just in time and saves Lyra from being severed from Pan.
Lyra escapes from her scary mother once again (whew!) and rejoins the gyptians, who are now fighting the Bolvangar forces. Lyra, Roger, and Iorek take off in Scoresby's hot air balloon and, along with Serafina Pekkala, head for Svalbard, the land of the bears where Lord Asriel is imprisoned.
In the book's final section, we move to the country of the bears, where Iorek fights the king bear, Iofur Raknison, to get his title back. Lyra plays a large role in this plot by pretending to be a daemon and convincing the bear king (who badly wants a daemon) to fight Iorek in the first place. Iorek wins, of course, and for her powers of persuasion Iorek gives Lyra the name "Lyra Silvertongue" (20.25).
After Iorek takes his throne, Lyra and Roger finally find Lord Asriel in his remote laboratory in the North where he is (kinda sorta) being held prisoner. Lord Asriel is not pleased to see Lyra at all, until he sees that she's with her friend Roger. Strange? Definitely.
Lyra confronts her father and presents him with the alethiometer, but he won't take the device. Lyra is puzzled, but she puts two and two together when Lord Asriel steals away in the night with Roger and sacrifices him in order to create a burst of power that will create a bridge to the stars. Um, what? Well, Lord Asriel is trying to access a world beyond the stars, and only the power generated from severing a child from its daemon can achieve this. That's why he was upset to see Lyra on his doorstep: he thought he might have to sacrifice his own daughter. Instead, he used Roger. Lyra feels horrible that, in an attempt to save Roger, she ended up getting him killed.
Never far behind, Mrs. Coulter tries to stop Lord Asriel from crossing into the other world, but he goes across the bridge anyway. The man wants to conquer Dust once and for all, but Mrs. Coulter won't accompany him. Watching all this unfold, Lyra and Pan realize that Dust must be a good thing if all of these nasty people want to get rid of it, so the two follow Lord Asriel across the bridge to continue the journey.