When Shantarakshita went to Tibet, he soon realized that resistance to the Teachings of Buddha was strong. The metaphysical and psychological content of Buddhadharma was of little concern to the indigenous religion, but the prospect of an association of self-disciplined individuals bound by vows and their allegiance to a spiritual preceptor promised to initiate a powerful new social and political force in Tibet. The Bon priests and ministers made common cause in two directions against Shantarakshita's plan to construct Samye Monastery. The ministers argued against the alteration of tradition and the introduction of a new political entity in Tibet, and the priests employed their skill in magic to create diverse ominous omens which they claimed showed the unhappiness of local gods and spirits with Shantarakshita's presence. Trhisong Detsen was not an absolute monarch, and when he felt compelled to forestall his plans to establish the Buddhist tradition in Tibet, Shantarakshita proposed that he himself withdraw and that Padmasambhava be invited to Lhasa.

The myriad classes of elementals and Nature spirits were well known to the Tibetan people. Bon priests had learnt the modes of magic used to manipulate them, whilst keeping secret the means for doing so, and many of the people had become superstitious about the potencies of the gods and demons and of the priests who could propitiate and pacify them. Shantarakshita decided that an individual who was accomplished in magic as well as in Buddhist doctrine and ascetic discipline would have to confront Bon resistance on its own ground, and Padmasambhava excelled in all three.

Padmasambhava's life is immersed in a medley of elaborate legends, and little is known of the historical individual outside them. He was not a composer of doctrinal texts or commentaries, and his remarkable feats in subduing the deities of Tibet were celebrated in tales which grew richer with repetition. The repression of Buddhadharma and the monasteries under King Lang Darma and also the disintegration of a unified Tibet into numerous chiefdoms together destroyed most historical records. The lives and activities of early Buddhist teachers survive in terma, documents said to have been hidden away and discovered centuries later by tertons or treasure finders, often monks who came upon hidden manuscripts, compiled old records, or wrote what they learnt from deep meditation upon and union with a mandala devoted to a teacher. Termas expounding the life of Padmasambhava – or Guru Pema, as he was sometimes called – abound, for the 'old school' reveres him as the second Buddha. These revealed accounts are namtars, life stories told in ways which aid disciples on the path to emancipation, and they do not claim to be literal.

According to several stories, Padmasambhava, the Lotus-Born, was the son of King Indrabhuti of Uddiyana and husband of Mandarava, Shantarakshita's sister. It is said that Amitabha, Lord of Boundless Light, sent a manifestation of himself in the form of a red ray of light flashing like lightning into the sacred lake of Uddiyana. There King Indrabhuti discovered a great white lotus open to the morning sun, and on its petals sat a handsome boy eight years old, luminous like a god and holding a sceptre. Hence he was called Lotus-Born. He evinced wondrous powers as he grew up, but he renounced the throne of Uddiyana for a life of meditation. When he accepted the invitation to travel to Lhasa, only Mandarava of his many wives chose to journey with him. Other stories say that he was born in Zahor, where Shantarakshita was the son of the king. Whilst the location of these kingdoms is a matter of scholarly disagreement, many place them in Bengal, seat of early tantric practices. Uddiyana was renowned for its magicians and Zahor was a centre of Buddhist tantra, and all sources agree that Padmasambhava excelled in both magic and tantra.

In Tibet the tension between Hinayana and Mahayana forms of Buddha's Teachings was resolved by invoking a hierarchical understanding of their relationship. Hinayana doctrine and practice is suitable for all aspirants and leads the individual who follows it faithfully to individual Enlightenment. In this sense it is the path of the Pratyeka Buddha, who achieves emancipation for himself. The Mahayana is the path of the Bodhisattva, who wants Enlightenment only for the sake of helping all beings and who renounces the fruit of emancipation in order to work in the world for the redemption of humanity. To these is added Vajrayana (the diamond vehicle) or Mantrayana (the mantra vehicle), which is the secret way to highest Truth and ever remains secret to one whose mind has not become that Truth itself. The Shriguhyagarbhamahatantraraja teaches: "The dharma which is the utmost secret is the intrinsic secret behind manifold manifestation, utterly secret through self-existence, than which there is nothing more secret." Since absolute Truth is sui generis, consciousness must necessarily transcend all habitual, discriminative and differentiated modes of activity to behold it. Wisdom, jnana, is incognizable and yet is hidden within the stream of consciousness. It is the source of every good quality, but just as light radiating from the sun veils the orb which is its source, so too the qualities pouring forth from the fount of jnana hide their point of origin.

Put in another way, Hinayana constitutes the public teachings of Buddha, Mahayana consists of his instructions to pledged disciples, and Vajrayana is the discipline he taught as guru to those who had fully prepared themselves for the undertaking. Precisely because Vajrayana is potent and involves the totality of an individual's life and being, it is dangerous. Like a ship crossing a stormy sea, where the slightest divergence from its plotted course will cause it to perish on the rocks rather than enter the calm harbour, Vajrayana requires total self-mastery and precision in thought, feeling and act. The possibilities for abuse through misunderstanding and desire for personal glorification and the chances of terrible spiritual and psychological damage are so great that Tsong-Kha-Pa in the fourteenth century based his sweeping Buddhist reform on the principle that one had to master Mahayana before entering into Vajrayana. His reformed order, the Gelukpa or Yellow Hat school, is the tradition of the Dalai Lamas, and though the 'old orders', and especially the Nyingma, did not accept the reform, they nonetheless quietly assimilated many of its elements. Even in modern times, H.P. Blavatsky found it necessary to warn against attempting tantric practices, for anyone who cannot "slay the lunar form at will" would be subject to misunderstanding from the start, and if persistent, would end in perversion and even soul destruction. Since the incognizable Truth can only be alluded to, one has to be wholly detached in regard to the colourful and creative, violent and erotic, imagery used in Vajrayana to point to the depths of the mystery of being and becoming. Vajrayana is never taught in books, save in code language; its meaning is imparted by guru to chela, tailored to the nature and needs of the consciousness of the disciple.

Vajrayana deals with the fusion of prajna and upaya, insight and means, doctrine and discipline. According to the Kangyur this confluence of meditation and action occurs on four levels. The first deals with disciples still attached to and involved with outer action, including ritual and magnetic purification. This is Kriya Tantra and is represented by laughing deities. Carya Tantra is for those who enjoy outer and inner action in equal measure, and it is represented by gazing deities. Intertwined deities represent Yoga Tantra, used by those accomplished in meditation to overcome their attachment to the life of the mind. Anuttara Tantra is for those wholly absorbed in inner yoga and who delight in it, and it is depicted by deities in complete embrace. Tsong-Kha-Pa found it necessary to remind monks that the imagery corresponds to transcendent psychological and inexpressible metaphysical states and not to entities, just as the occult physiology of the human form does not refer to physical anatomy and physiology. In the subtle vestures are to be found three nadis or channels, rasana, avadhuti and lalana, corresponding to the Hindu pingala, sushumna and ida, to the right, middle and left of the spinal column. Along the central channel are chakras, or centres of force and energy, which correspond to states of consciousness. According to Tsong-Kha-Pa, the waking consciousness finds mind in the navel, the nirmana centre which the Hindus know as manipura. In dreams consciousness rises to the neck, the sambhoga centre, called by the Hindus vishuddha. In dreamless deep sleep the mind abides in the heart, or dharma centre, known in the Upanishads as the anahata. When all the polarities are united in consciousness, it rises to the mahasukha (ajna) centre in the head. Total control of consciousness within the subtle vestures prepares the disciple for the transfer of the guru's wisdom-light in initiation.

No one knows the levels of prajna or kinds of upaya Padmasambhava found it appropriate to teach, but all the stories of his life extol his unequalled attainments as a yogin and a siddha who had mastered the supranormal faculties. He was informed by Shantarakshita of the resistance to the Buddhadharma in Tibet, and he entered the country with a plan to face the Bon priests as their superior by their own criteria and yet to win their allegiance by making them protectors of the Teaching. When Padmasambhava entered Tibet, he did not go straight to Lhasa, but rather roamed the plateaus and valleys in search of local spirits and deities. In a terma ascribed to Yeshe Tsogyal, Padmasambhava recounted the story of his life and listed the demons he faced:

On the banks of the Nyimakhud Lake in Tibet, I subdued the cruel mountain gods and barbaric cannibal spirits: all these were bound under oath to the Dharma. On the Khala Pass I subdued the twelve guardian protectresses of the White Mountain. . . . I subdued all the lords of the earth of the northern regions. In Tsang I subdued the pestilential spirits of Oyug: all these were bound under oath to the Dharma.

The elaborate Padma Ka'i Thang (Life and Liberation of Padmasambhava), a terma also ascribed to Yeshe Tsogyal, explained how Padmasambhava managed to win over his invisible and visible antagonists by making them responsible for the safety of the Teaching:

In the autumn, Padma came to the castle of Mang Yul. A demoness of the region of Zhang Zhung, Jamun the eminent enemy, thought she could crush the guru between two stone mountains. But he rose up in the sky, and the humiliated demoness offered the heart of her life. As her secret name was Debt of Turquoises and Diamonds, the guru gave her a great treasure to watch over.

In regard to all the entities Padmasambhava encountered, including priests, magicians, sorcerers and shamans, he first subdued them by evading their traps and snares and then by offering them something precious to protect. Each treasure was symbolically illustrative of an aspect of the Buddhadharma. He also altered the meaning of signs and omens:

On Mount Kailas, I bound the Stellar Forces of the Lunar Mansions, and on Targo I brought the dark Planetary Forces under the control of Dharma.

When Padmasambhava eventually met King Trhisong Detsen, he did not mince words:

I am the Buddha who is Lotus-Born, possessing the precepts of highest insight. Skilled in the fundamental Teachings of Sutra and Tantra, I elucidate the Buddhist Ways without confusion.
I am the Dharma which is Lotus-Born, possessing the precepts of progressive practice. Outwardly I don the saffron robes of a monk; inwardly I am the highest of Vajrayana yogins.
I am the Order which is Lotus-Born, possessing the precepts which unite insight and practice. My knowledge is higher than the heavens.

Soon Padmasambhava exorcised the site of Samye Monastery, and Shantarakshita was recalled from his voluntary retreat in Nepal to oversee its construction and consecration. Once novices were trained and monks ordained, Shantarakshita's stupendous translation programme began. Bon ministers of the king still resisted the work of Shantarakshita and Padmasambhava, but the priests gradually adopted a different mode. They built their own monastery, and the sagely among them adapted various Buddhist tenets and practices to the Bon religion. Thus Reformed Bon emerged and eventually became deeply involved with Nyingma or 'old school' traditions. Tsepong Ze, one of the king's wives, attempted to undermine Buddhist efforts by destroying the translation programme. Though she could not easily attack the Indian and Chinese translators, she managed to force some of the Tibetans into exile. Accusing Vairotsana of rape, a charge the king did not believe, she forced him into banishment, though he remains to this day one of the most revered of the first monks of Samye. She exiled Namkhai Nyingpo, but he went to Bhutan and became famous for spreading the Buddhadharma there. Tsepong Ze's worst fury, however, was reserved for Padmasambhava and his disciples. Padmasambhava was exiled to Turkhara in Turkestan for seven years, and when he returned, his opponents waited for some pretext on which to force him to leave Tibet again.

Even though some ministers sought the downfall of Padmasambhava, King Trhisong Detsen was drawn into his circle of intimate disciples. When he asked to be initiated into Vajrayana, Padmasambhava placed him on a year's probation, and the king took the time to devise the gift he would give his guru. Yeshe Tsogyal was born a princess of Kharchen, and while still young she married Trhisong Detsen. She had been drawn to the Buddhadharma and to the teachings of Padmasambhava, and when the time came for the king's initiation, she willingly allowed herself to be given to her teacher. Offering a princess and wife of a king as a disciple and companion to a wandering ascetic violated the social traditions of the time. Tsepong Ze and the Bon ministers were incensed, and many others were scandalized and remained silent when there was a clamour for Padmasambhava's exile. Fearing that both his guru and Yeshe Tsogyal might be murdered, the king acceded to the demand for banishment, but instead of sending them to the distant regions decreed as their places of separate exile, he saw to it that they secretly retired to Tidro to meditate.

Guru and disciple remained together in Tidro for a number of years. According to the termas, including The Secret life and Songs of the Tibetan Lady Yeshe Tsogyal, the princess excelled in meditation and successfully passed through a number of initiations. She became one in consciousness with Padmasambhava and was eventually sent by him to Nepal, where she visited the ancient E Vihara. Though long gone, this monastic community is believed to have existed on the site of the Kashthamandapa temple in Katmandu. Shaivite yogins resided there from the twelfth century until recently, but a small group of tantrikas still perform ancient Buddhist rites there. Nearby is the cave where Padmasambhava is said to have attained Enlightenment before his sojourn in Tibet, and the area is as sacred as Bodh Gaya to Nyingma monks. When Yeshe Tsogyal returned to Tidro, she brought disciples with her.

Events after this retreat are confused. The king recalled Padmasambhava and his disciples to Lhasa. For a time religious and social peace was restored to the kingdom, and Trhisong Detsen felt confident enough to disperse trained monks throughout Tibet. The wise Drenpa Namkha Wongchuk was invited to Samye, and he provided a bridge between Buddhist and Bon standpoints, since he knew and practised both. When Kamalashila, Shantarakshita's disciple, led the great Samye debate between Chinese and Indian perspectives, the Indian modes were secured for Tibet. Trhisong Detsen, however, was careful to see that the retiring Chinese monks were treated with reverence and honour. It is said that Yeshe Tsogyal played an important role in resolving the debate. When Trhisong Detsen died, court intrigue threatened to destroy the unity of Tibet. Tsepong Ze poisoned her own son, Mune Tsenpo, shortly after he ascended the throne, in part because his Buddhist beliefs led him to propose a programme of land redistribution. His brother was crowned as Mutik Tsenpo and ruled for a decade. Though Yeshe Tsogyal stopped the internecine war and persuaded the ministers to renounce schism, Tsepong Ze exiled her. Padmasambhava decided his work was completed in Tibet and announced his intention to travel south, where he disappeared from history and remains a mystery in long-standing tradition. Shantarakshita died and Kamalashila became the second abbot of Samye. When King Repachan ascended the throne, Yeshe Tsogyal returned to pay homage to Shantarakshita's chorten at Samye and died shortly afterwards. Repachan revered her memory and declared her parinirvana in about AD. 817.

The termas tell of Padmasambhava's departure. The king and many disciples followed him to the top of a great pass. There he took his leave and rose into the sky, speeding southward and leaving a rainbow trail in the sky. Then they sat in meditation and "they saw him like a ray of the sun, passing beyond India without touching upon Uddiyana; they saw him reach the top of Mount Jambuza and alight. . . . Near the Fire City, he sat in the cool shade of a celestial magnolia tree." Yeshe Tsogyal spoke for all of the disciples when she lamented: