This is a story about a visit to the place where dreams are made. The Dream Factory is run by a gnome named Bilby and his Elves. They monitor people's thoughts, process them and create dreams, sent out with helpful messages.

As our story begins something has gone wrong. An evil Demon has broken into the Dream Factory and put a harmful message into a dream. The affected dream is that of Tommy, a 12-year old boy from the town of Dorum in England.

Tommy's younger brother, Timothy had been hospitalized earlier that day after a fall from a tree left him unconscious. Tommy was playing with his grother in the tree and may have inadvertently startled him. In his dream, Tommy sees himself visiting his beloved brother in the hospital. Timothy, startled by Tommy's appearance, has a heart attack and dies. Tommy hears a strange voice warning him that if he visits his brother, his brother will die!

Tommy wakes up, discovers that he is running late and hurries off to school. The students of Dorum School are talking about Timothy's fall. Mrs. Frinkle enters and teaches the students about dreams. After class Tommy tells the students that on his way to school he saw a new path cutting through the mysterious Dorum Woods and he took it to save time. He tells of passing a strange gate and his desire to see what might be behind it. Only his friend Donna agrees to accompany him.

The students and teacher visit Timothy in the hospital. The doctors think Tommy's presence would be helpful, but Tommy, frightened by his dream, has not come.

Tommy and Donna meet at the gate in the woods and find a way in. They find themselves in a wondrous jungle, with fantastic creatures -- Phloosnics, Phlanters, Beebees and Schreeges. The playful creatures are frightened off by the arrival of a tribe of Cannibals, who capture Tommy and Donna. The Cannibals are about to eat them, when they are frightened off by a booming voice that seems to come from everywhere.

Tommy notices a sign pointing to the Dream Factory and he and Donna head that way. They arrive at the Dream Factory castle gate. They are told by the guards that they cannot enter without the password. They are aided by a voice that gives them the password.

Inside they are greeted by Bilby. He takes them on a tour of the factory. They play with Bilby's original Dream Machine, now converted into a marvelous toy. Bilby takes them to meet the Elves who do the work of the Dream Factory. The Elves explain their role in putting together Donna's wonderful dream of last night. Tommy mentions his dream. Bilby tells them he helped them in the jungle, because he needed to bring Tommy to the factory to correct the dream's message.

Meanwhile, in the jungle a band of Demons and their King are plotting to take over the Dream Factory, so they can rule the world by controlling people through their dreams.

Back inside, Bilby starts up the awesome Dream Machine. Tommy sees angels singing to him that he should go see his brother. Karate fighters encourage him to do the same.

Whe the new dream is over Tommy and Donna are ready to leave. Bliby is having too much fun; he tries to keep them there a little longer. When they promise to return to visit again Bilby finally agrees to help them get home. Too late! The Demons have tricked the guards and are now in the factory! The Demon King beats Bilby in a battle for the key to the Dream Machine.

Before getting to their evil work, the Demons take a short nap. Donna noticed that the Demon King seemed to be afraid of the cute elf-dog. Together with Bilby they figure out a way to use the original Dream Machine to send a signal to the big Dream Machine to produce cute animals. When the Demons wake up and see the cute animals the Demons are frightened away.

Back home Tommy is just waking up on the same morning when the story bagan, thinking the whole thing was just a dream. Donna arrives and tells Tommy about her strange dream. It was identical to Tommy's. They realize that it was not a dream after all. Donna says that on her way over she noticed the path to the gate was not there. They realize that Bilby must have known that he would have to move the Dream Factory to avoid the Demons. They know they will probably never meet again.

Tommy goes to the hospital to see his brother, who regains consciousness and the boys embrace as the curtain closes.