Covington is a 19th-century Pennsylvania village that is isolated from the rest of the world. The woods that surround the village are off limits to all the villagers because mystical creatures live there. Many years earlier, the town elders and the creatures reached an understanding that the villagers would not go into the woods, and the creatures would not enter the village. A boundary was set up around the village. Lucius Hunt (Joaquin Phoenix) has been curious his whole life, and now he wants to go into the woods and travel to the next town. His mother Alice Hunt (Sigourney Weaver) advises him to stay home and forget about the outside world. The town leader, Edward Walker (William Hurt) also warns Lucius of the danger. The beautiful and determined young blind woman, Ivy Walker (Bryce Dallas Howard) who loves Lucius, wants him to forget about the outside world. But the single-minded Lucius goes into the woods a short distance and returns to the village. That night, the creatures come into the village and kill some of their animals. The next night the villagers find red marks on their front doors. The creatures are giving the villagers a warning to stay out of the woods.

Ivy's relationship with Lucius deepens, and it arouses feelings of jealousy in Ivy's friend, Noah Percy (Adrien Brody), who is mentally challenged. Noah lapses into a sudden fit of rage and stabs Lucius. With Lucius being seriously wounded, Ivy becomes determined to journey to the nearest village and seek medicine. Nobody in the village can talk her out of it, so Edward takes her into his confidence and reveals a startling truth to her: there are no creatures in the surrounding woods. The creatures are nothing more than Edward, Alice, and the other village elders dressed in costume. The sounds of the creatures are their responsibility, too. Ivy does not have to fear creatures in her journey, but something does indeed follow her into the forest. Noah has escaped his confines and gone after her into the woods.

Ivy travels through the forest until she reaches a barrier. Beyond the barrier is a road; a modern road. It is not the 19th century at all. A car passes Ivy; she is terrified because she does not recognize the sounds that the car makes. The car slows down and picks her up, and she is taken to a rangers station. Covington is actually located inside an enormous wilderness preserve. Edward Walker is actually a multimillionaire who met the others, the village 'elders', through a support group. All of them were stricken in some way by urban violence, and the idea of the village came to them as a means to revert to times that they felt were more innocent and non-violent. Walker secured the area of the village and built Covington there with his new associates, declaring the airspace over Covington to be off limits to aircraft (which would be unexplainable if seen by the children who were not aware of the time period).

Alice returns to the village unsure of the future of the village or Lucius, who seems as if he could make a recovery with the medication that is given to her by the park rangers.