Six-year old Amy Reed inhabits a fantasy world in which butterflies are her friends. Amy's fancy troubles her father, Oliver Reed, because her behavior reminds him of his first wife Irena, whose madness drove her to death. After Oliver discovers that Amy has placed the invitations to her birthday party in a "magic tree" mailbox, he asks her to promise to make friends with the neighborhood children. Amy's attempt at friendliness is spurned by the children, who run away from her. Amy follows them, and as she pauses at the gate of an old house, an old woman's voice beckons her into the garden. From the window, the woman drops a ring wrapped in a handkerchief. Amy takes the ring, but the handkerchief is snatched from her by Barbara Farren, the old woman's sinister daughter. When Amy returns home and tells her father about the voice from the window, he refuses to believe her. Alice Reed, Amy's mother, disagrees with his assessment of their daughter, and the two argue. While playing in the garden one afternoon, Amy wishes for a friend. Suddenly, leaves begin to fall from the trees, the light glistens and Amy begins to run and play with her imaginary friend. That night, Alice tells Amy that she must return the ring, and the next day, the little girl goes to the Farren house. There she meets Julia Farren, Barbara's demented mother, who insists that her daughter is dead and that Barbara is a spy. As the theatrical Julia terrifies Amy with the story of the headless horseman, Edward, the Reeds' servant, arrives to take the little girl home. That night, Amy has a nightmare about the headless horseman and calls to her friend to comfort her. Summoned by Amy's call, a gentle wind followed by a shadow enters the room. The next morning, Amy finds an old photo of Irena in a desk drawer, and when she goes into the garden and calls to her friend, Irena appears. Fall passes into winter, and on Christmas Eve, Amy slips out of the house to present Irena with her gift. Amy also has a gift for Julia, who delights in the little girl's visit, while denouncing her own daughter. Later, Amy finds a photo of Oliver and Irena and announces that the woman in the picture is her friend. Alarmed, Oliver accompanies Amy to the garden and tells her to summon her friend. When Amy insists that Irena is standing under a tree, Oliver punishes the little girl. As Amy, chastened, sobs in her room, Irena appears and tells her that she must leave forever. After bidding Amy farewell, Irena disappears into the shadows. Looking for Irena, Amy sneaks out of the house and wanders into the woods just as snow begins to fall. Amy's teacher, Miss Callahan, has been visiting the family and disagrees with Oliver's punishment of his daughter, urging him instead to become the little girl's friend. When Oliver goes to Amy's room to apologize, he discovers that she is missing, and after he calls the police, they begin to search the woods. Meanwhile, Amy, who is caught in a raging blizzard, remembers the story of the headless horseman and hears hoofbeats in the distance. Amy cringes in fear as the sound of hoofbeats turns into the rattling of an old car, sending the little girl scurrying to the Farren house for refuge. Barbara has vowed to kill Amy if she returns to the house, and consequently, when Amy knocks at the door, Julia tries to hide her upstairs, but collapses and dies on the staircase. Suddenly appearing at the foot of the stairs, Barbara menacingly advances toward Amy until the little girl calls for her friend. In Amy's eyes, the image of Barbara is replaced with that of Irena, and the child embraces her antagonist. Amy's embrace disarms Barbara, who hugs the child. At that moment, Oliver and the police arrive at the house, and Oliver promises to be Amy's friend and accept her imaginary companions. No longer needed, Irena disappears.