Eight-year-old Annie Rust has a vivid dream one night that a frivolous dragon and a fairy with a punk-rock hairdo visit her in her bedroom. When she discovers the next day that it was no dream, she's overjoyed. Her parents and friends are nice, but school is making her life miserable: she's about to flunk out of half her subjects.
At first she thinks her new friends will help her forget her troubles, but the opposite is true. As soon as they decide they can trust her, they tell her why they've broken the strict fairy laws and revealed themselves to her. Her uncle and his hard-hearted partners are planning to cut down the trees in a place the kids call the Haunted Woods and build fancy new houses. If that happens, the fairy warns her, dreadful consequences will follow, which might include the destruction of all of America, and maybe even the world.
Although sworn to secrecy, Annie knows that she can't solve this problem alone. She drags her best friend, and finally her well-meaning uncle, into the search for a solution. But it turns out that Annie's fairy and dragon are only children themselves, and when their parents discover what they've done, they take Annie and her uncle underground to show them first-hand why they must stop the development.
For all their good intentions, no one—not the fairies, the dragons, or her reformed uncle—can find a way out of the danger. It's up to Annie, a girl who can't even focus on her homework for five minutes in a row, to think of a way to stop the horror under the hill from erupting and destroying everything she knows.