Set in mid-Europe sometime in the late 18th century where Mytyl (Shirley Temple), the bratty daughter of a woodcutter (Russell Hicks), finds a unique bird in the Royal Forest and selfishly refuses to give it to her sick friend. That night, she is visited in a dream by a fairy named Berylune (Jessie Ralph ) who sends her and her brother Tyltyl (Johnny Russell) to search for the Blue Bird of Happiness. To accompany them, the fairy magically transforms their dog Tylo (Eddie Collins), cat Tylette (Gale Sondergaard), and lantern ("Light") into human form. The children have a number of adventures. The dream journey makes Mytyl awake as a kinder and gentler girl who has learned to appreciate all the comforts and joys of her home and family.