Kendra and her brother Seth must spend two weeks with their grandparents while their parents go on a cruise. Dreading the trip (they have not been to their grandparents before) they arrive and are told they cannot enter the woods or the barn - otherwise they are free to do what they wish. The property is covered in gardens, with many butterflies and hummingbirds. Seth immediately begins investigating the woods, at one point coming across an old woman named Muriel living in an ivy shack. She invites him in, but Seth, finding her odd (and even calling her a witch) refuses and runs back to the house. Next, Seth takes Kendra to a pond hidden in the woods that has beautiful gazebos and even a boathouse.

The children returned to the house, confused, only to find that Grandpa Sorenson has learned of their trips into the woods. He reveals that the rules are for their own safety, as there are dangerous creatures in the woods. They are punished to spend the next day in the house, and warned that if they go in the woods again, the rest of their trip will be spent inside. That day and the next Kendra follows a series of clues (the first presented by her Grandfather) that lead her and Seth to drink the milk that the caretaker Dale sets out every morning for the birds and butterflies. After drinking it, they find that it was not birds and bugs, but instead thousands of fairies that inhabited the garden.

Inspired by Maddox, the fairy trapper, Seth catches a fairy in a jar and leaves it in the house overnight. The fairy, though, turns into an imp (because it was left indoors from sunset to sunrise). The other fairies, learning what Seth has done, attack him and turn him into a deformed walrus monster. Grandpa Sorenson is forced to take Seth to Muriel (who is, in fact, an imprisoned witch) to change him back. She does, but they must first release one of her two remaining bonds.

Midsummer Eve approaches, a night when the evil creatures that are usually confined to the woods are free to roam wherever they please. The children are told to stay in their room, under their covers and they will be fine. In the night however, they hear a baby crying on the roof. Seth, investigating it, sees the baby is about to be attacked by wolves. He opens the window to the room, and instead of a baby and 2 wolves, 3 monsters had entered the room. Retreating to their beds, Seth is only narrowly able to save the pet chicken before it is eaten by a monster. Dale bursts in with a shotgun and drives the monsters downstairs.

At sunrise, they descend the stairs to find the house ravaged and everyone missing. Dale has been turned to stone on the front lawn but there is no sign of their Grandfather (or the housekeeper Lena). While investigating a loud sound coming from the barn, they discover a giant cow (Viola) from which the magical milk is collected. In pain from not being milked, the cow continues to bellow until the children are able to milk her. Returning to their room for clean clothes, they see a note on the floor spelled out in chicken feed "I am Gram". Not knowing what else to do, they take the chicken to Muriel to fix their grandmother. She is able to, but at the cost of freeing her last restraint.

Restored, their Grandmother takes them to a troll who is able to reveal Grandpa Sorenson and Lena's location (in the basement of the Forgotten Chapel). On their way there, Grandma Sorenson reveals that there is an artifact of great importance at Fablehaven (but no one knows where). Also, she tells them that there is a Demon (Bahumat) bound in the basement of the church and that Muriel will try to free him. When they arrive at the chapel Muriel is, in fact, attempting to free Bahumat. She is, it turns out, also a member of the evil organization, the Evening Star, which is bent on destroying fairy preserves and finding the hidden artifact at Fablehaven.

Aided by an army of imps, Muriel subdues Grandma Sorenson and Seth. Kendra, however, is safe because she has not harmed any magical creatures nor performed any magic. She is told to flee so there may be one survivor who can share the truth. She runs, but decides to visit the fairy queen on the island of the hidden pond. The queen hears her pleas for help, and has her make an elixir of tears, blood, and Viola's milk. The fairies, drinking the elixir, grow to human size and will now obey Kendra's commands. She sends them to the Forgotten Chapel to capture Muriel and Bahumat.

The fairy army succeeds in battle, kissing imps to return them to their rightful place as fairies, and binding Muriel and Bahumat under a mound of earth that was formerly the chapel. Some fairies are killed in battle, and Lena is returned to the lake (she was a naiad turned human), but Seth and the Grandparents are saved. Kendra is now able to see magical creatures without the aid of Viola's milk. Seth and Kendra's parents return a few days later, with the expectation that the children will return to Fablehaven.