The story involves Willow Ufgood (Warwick Davis), a farmer who dreams of becoming a sorcerer's apprentice among the Nerwyns, which are a race of little people. One day, he encounters a baby who has washed onto the riverbank near his farm. The baby, who we come to learn is named Elora Danan, is a Daikini, a race much larger than the Nerwyns, but Willow's brethren don't think it's a good idea to keep her. The evil-witch Queen Bavmorda (Jean Marsh) has minions, including her warrior-princess daughter Sorsha (Joanne Whalley) and vicious skull-faced warrior General Kael (Pat Roach), actively searching for this baby smuggled out from under her nose because she may be the prophecy foretold to end her reign, a child with a special mark upon its arm. Willow accepts the mission to return the baby back to the first Daikini he meets, with a few other Nerwyns in tow.

Along the way, they encounter and recruit that first Daikini, Madmartigan (Val Kilmer), a skilled but down-on-his-luck mercenary, who agrees to take the baby for release from capture.  THe Daikinis are in the midst of a war with the legions on Bavmorda's side, putting Elora's fate in jeopardy should they fall short. However, Willow gets another directive from a fairy to find the good witch on a remote island. With Madmartigan and a couple of Brownies, who are from a human-like race even smaller than the Nerwyns, only nine inches in height, Willow seeks to find a way to protect the baby. Ron Howard directs this story by producer George Lucas.