The song "Candle on the Water" received an Academy Award nomination, but lost to "You Light Up My Life" from the film of the same name. Helen Reddy's recording (with a different arrangement than the one her character signs in the film) was released as a single by Capitol Records, reaching #27 on the adult contemporary charts. The film also received a nomination for Original Song Score and Adaptation or Adaptation Score, losing to A Little Night Music.
A young dusty-haired orphan named Pete is fleeing his abusive foster family, the Gogans. As they pursue him ("The Happiest Home in These Hills") an unseen force, which Pete calls Elliott, distracts them. Lena, her husband Merle, and their sons, Grover and Willie, are determined to find Pete because (in Lena's own words) "We paid $50 for that kid, and we ain't got fifty more." The lazy, inept, and constantly-bickering Grover and Willie are told by their equally-heelish parents that "If we don't get him back, you two boys are gonna have to start working on the farm with your own two hands."
The next morning Pete and Elliott, revealed to be a dragon, share breakfast ("Boo Bop BopBop Bop (I Love You, Too)") and decide to visit a nearby town called Passamaquoddy. Due to the clumsy antics of the invisible Elliott, Pete is labeled a source of ill luck and must flee. Lampie, the lighthouse keeper, stumbles out of a tavern and encounters Pete. A mischievous Elliott makes himself visible to him and he, terrified, runs into a saloon to warn the townspeople ("I Saw a Dragon"). His capable daughter, Nora, takes him back to their home, the local lighthouse, settles him down, and puts him to bed.
Meanwhile, in a seaside cave, Pete rebukes Elliott for causing trouble. Just as they make up Nora appears, having spotted Pete earlier. She offers him shelter and they talk ("It's Not Easy"). He is inquisitive and soon learns the story of her fiancé, Paul, whose ship was reported lost at sea. He promises to ask Elliott about Paul and she accepts, believing Elliott to be an imaginary friend.
The next morning, Dr. Terminus, a medicine showman, and his assistant, Hoagy, haphazardly arrive and manage to win over the gullible townspeople, who are initially angered by their return ("Passamashloddy"). That evening Pete visits Elliot and Nora thanks Lampie for pretending that Elliott exists. He insists he actually saw him and she tells him to be realistic, to which he retorts that her hoping for Paul’s return is just as unrealistic. He apologizes for his outburst and excuses himself, giving her time to think ("Candle on the Water"). At the tavern, he tells Dr. Terminus and Hoagy about Elliott. Dr. Terminus dismisses the tale, but Hoagy agrees to go to the cave. After an encounter with Elliott (in which all three, including Elliott, become frightened) Hoagy offers him some liquor as a gesture of peace, which triggers a fiery belch that chases them away.
The local fishermen complain about the recent scarcity of fish and believe Pete is the cause. Nora reminds them the fishing grounds shift from time to time, and that "There's Room for Everyone" in town. She takes Pete to start school, where he is punished unfairly by Miss Taylor, the strict teacher, as a result of Elliott's antics. He, enraged, smashes into the schoolhouse.
Dr. Terminus, now convinced of Elliott's existence and having learned that dragon anatomy has many medicinal uses ("Every Little Piece"), makes Pete an offer for Elliott, to which he refuses. He gladly accepts Nora and Lampie's offer to live with them ("Brazzle Dazzle Day"). The Gogans arrive in town and confront them ("Bill of Sale"), only to be firmly defied by Nora and thwarted by Elliott. Dr. Terminus makes a deal with them and convinces them that helping him capture Elliott will solve their problems.
That evening, a storm begins to blow. Pete tries to tell Nora the good news that Elliott found Paul and he's on his way home. However she, still believing that Pete has imagined Elliott, replies that he has no more need to believe in him. Even Lampie begins to doubt that he saw him. Undeterred, Pete helps Nora prepare the lighthouse for the storm. Out at sea, a sailing ship is approaching Passamaquoddy, its captain assisted by Paul.
Dr. Terminus lures Pete to the boat house, while Hoagy does the same to Elliott. Once there, Elliott discovers Pete but is caught in an immense net. He frees himself and rescues Pete from the Gogans before they can escape. He incinerates their bill of sale, then douses them all with a barrel of tar before chasing them off. As Pete and Elliott celebrate, Dr. Terminus aims a harpoon gun at the latter, but its rope is looped around his ankle and he is sent flying through the ceiling. After rebuking Dr. Terminus and Hoagy, Elliott saves the mayor and other townspeople from a falling telegraph pole, revealing himself to the grateful townspeople.
Back at the lighthouse, the lamp has been extinguished by a storm-driven wave. Elliott comes and tries to relight it with his own fire. As he is doing so, Nora finally sees that he is real. After several failures, the lamp is relit and the ship is saved. As a reward for doing this, Nora gives Elliott a kiss. He is scared that he will become invisible after being kissed and he does.
The next morning the townspeople praise Elliott for his help and Nora is reunited with Paul...who, as it turns out, was the sole survivor of a shipwreck at Cape Hatteras. However, he suffered total amnesia due to his ordeal in the storm. Then, one day recently, his bed suddenly tipped over (courtesy of an invisible Elliot), he bumped his head, and got his memory back.
Sadly, now that Pete is safe and has a loving family of his own, Elliott reveals that he must go. He and Pete say their goodbyes and he flies off to help other children in need.
- Sean Marshall as Pete, the protagonist and orphan boy whom the Gogans treat like a slave
- Charlie Callas as the voice of Elliott the dragon, the deuteragonist
- Helen Reddy as Nora, the tritagonist and Lampie's determined, headstrong daughter and
- Mickey Rooney as Lampie, the tetartagonist and the town lighthouse keeper and Nora's father
- Jim Dale as Dr. Terminus, a scheming quack and the main antagonist
- Red Buttons as Hoagy, the secondary antagonist and Dr. Terminus' assistant
- Charles Tyner as Merle Gogan, the patriarch of the Gogans and Lena's older husband
- Shelley Winters as Lena Gogan, the matriarch of the Gogans and Merle’s younger wife
- Jeff Conaway as Willie Gogan, Merle and Lena’s older son
- Gary Morgan as Grover Gogan, Merle and Lena's younger son
- Cal Bartlett as Paul, Nora's older husband and a sailor who has disappeared at sea
- Walter Barnes as the Captain of the ship on which Paul is returning home
- Jane Kean as Miss Taylor, the town schoolteacher
- Jim Backus as the Mayor of Passamaquoddy
Al Checco, Henry Slate, and Jack Collins appear in the film as local fishermen. Robert Easton plays a store proprietor, and Roger Price is seen as a man with a visor. Robert Foulk plays an old sea captain. Ben Wrigley plays the egg man and Joe Ross plays the cement man. Dinah Anne Rogers has an uncredited role as one of the townspeople, as does Dennis Stewart, who plays a fisherman, and Debbie Fresh is also uncredited as a child/dancer/singer.
- "Main Title"
- "The Happiest Home in These Hills" - Lena, Merle, Grover, Willie
- "Boo Bop BopBop Bop (I Love You, Too)" - Pete, Elliott
- "I Saw a Dragon" - Lampie, Nora, Townsmen
- "It's Not Easy" - Nora, Pete
- "Passamashloddy" - Dr. Terminus, Hoagy, Townspeople
- "Candle on the Water" - Nora
- "There's Room for Everyone" - Nora, Pete, Schoolchildren
- "Every Little Piece" - Hoagy, Dr. Terminus
- "Brazzle Dazzle Day" - Nora, Lampie, Pete
- "Bill of Sale" - Nora, Lena, Merle, Grover, Willie
- "I Saw a Dragon (Reprise)" - Townsmen
- "Brazzle Dazzle Day (Reprise)" - Pete, Nora, Lampie, Paul