As the curtain rises, a Jester takes the stage and tells the tale of a magic tree house full of books that will transport the reader to wonderful faraway settings ("Prologue, How Far Can You See?") Jack and Annie discover a book about knights and castles. In it, there is a bookmark with a strange inscription from the Black Knight, encouraging them to be brave and gallant if they wish to be knights ("You Must Pass My Test"). Inquisitive about the Black Knight and his quest, Annie wishes to visit the castle in the book. Before Jack can intercede, the tree house begins to spin, and the two are whisked away to the medieval castle ("A Spin Before Dawn").

At the entrance to the castle, three guards – Mustache, Squinty and Red – stand watch while a grand feast is being held inside to win the favor of the Black Knight. The rumor of the Black Knight's presence has attracted a crowd of commoners, all wanting to catch a glimpse of the elusive hero. The guards let only the nobility into the feast and toss the Commoners out ("Mustache, Squinty and Red"). Finally, the Black Knight arrives, and the guards, star struck, scramble to show him in. Just as the drawbridge is about to be pulled up, Annie and Jack slip through the castle gate.

Inside the Great Hall, the Jester and other minstrels are entertaining members of the Royal Court. The Duke requests a song about his favorite subject – himself. The Jester and Minstrels oblige, performing a song about the Duke and his brother, Harry ("The Apple Song"), whom the Duke imprisoned in the dungeon after Harry criticized the Duke's crop of apples.

Just as the Black Knight is about to enter, Jack and Annie are discovered by Yates, Rikki, Baxter and other kids whose parents work in the castle kitchens. Convinced that Jack and Annie are thieves, the kids run off to tell the Duke. Before they can return, Jack and Annie hide in a dark room. Annie clicks on her flashlight and discovers row upon row of shining Suits of Armor. With some help from the Suits of Armor, Jack and Annie imagine what it would be like to be a knight ("To Be a Knight"). Accidentally, Annie leans against a Suit of Armor, causing the whole line to topple like dominoes. Mustache, Squinty and Red appear and believe Jack and Annie are thieves or spies, that they are lying about their connection to the Black Knight.

Keenan, the dungeon master, and the Keepers of the Dungeon welcome Jack and Annie to their new home ("Welcome to the Dungeon"). As they are shown around the premises, they are introduced to Harry, the Duke's brother, now a sad old man who won't speak to anyone, and many other Vagrants who the Duke has had imprisoned for questionable reasons. Keenan and the Keepers leave, and Jack and Annie implore Harry to reveal the location of a secret passageway that might lead them to freedom. The other Vagrants say it's no use – Harry has given up hope and will speak to no one. Annie and the others encourage him to look deep within to find a glimmer of hope ("A Light in the Dark"). Encouraged by the youngsters' moving message, Harry offers to draw a map that leads to the secret passages of the castle. Jack clicks on the flashlight so Harry can see better, and everyone gasps, "Is it a wand... like the wizards carry?" Realizing the power she has, Annie summons Keenan and the Keepers of the Dungeon. When they appear, she shines the flashlight on them and threatens to use her magic wand. With the guards stunned, the prisoners make their escape to the orchard while Jack and Annie run toward another secret exit that leads to the moat and back to the tree house. The steps they are climbing suddenly come to an end, and the two must jump into the moat and swim to safety ("The Legend Begins").

The Black Knight appears on the shore, helps Jack and Annie out of the moat and praises them for passing his test – they helped the innocent without sword or might, but with their brains and their hearts. He dubs them knights and thanks them for their service ("You Have Passed My Test – Reprise"). Jack and Annie climb back into the tree house and wish themselves back to Pennsylvania ("Spinning Into Dawn"). As the sun starts to come up, the two start to imagine all the places they can go and the adventures they'll have in their magic tree house ("How Far Can You See? – Epilogue").