Professor Spencer Hale, once one of Professor Oak's top students and a good friend of the Ketchum family, is obsessed with discovering the secret behind the mysterious glyph-like Pokémon called Unown. One day while investigating some ruins, he disappears after encountering the enigmatic creatures, leaving his only daughter, Molly, alone back at his mansion.
When a shipment of tiles from the ruins arrive at the mansion, the poor girl's depression and desire for companionship invokes the Unown trapped within them. As Molly wishes, they use their reality-warping powers to seal off the mansion and the surrounding valley of Greenfield in crystals and create an illusion of the legendary Pokémon Entei to stand in for her father. When Molly wishes for a mother (who had also vanished), Entei kidnaps Ash's mother Delia (who was not too far from the mansion, visiting the nearby town with Porfessor Oak and Ash's group) and brainwashes her into thinking she is the girl's mother, prompting Ash to charge head-first into the mansion on a rescue mission to not only save Delia, but also everyone else from the increasingly destructive powers of the Unown, who are more and more manipulated by Molly's impulses and feelings, crystallizing more and more of the environment within the mansion's vicinity.
Molly notices that Ash, Brock, and Misty are trying to enter the mansion. Delia sees this too and when she sees Ash, she snaps out of her trance. Molly proceeds to deal with the intruders by approaching them with a projection of sorts. Since she is afraid that she is too young to be a Pokémon trainer, Molly "makes" herself older with the power of the Unown. As Molly meets Ash and his friends, she challenges them to a Pokémon battle and Brock accepts this challenge in order to let Ash and Misty gain enough time to save Delia, but loses to her own versions of super-powerful Pokémon, called Crystal Pokémon, created by the Unown according to Molly's wish. Ash and Misty are about to head up the second set of stairs when they are encountered by the older Molly again, but this time Misty takes her challenge. Surprised that the pre-teen Misty is old enough to be a Gym Leader, Molly restores her real age. She also changes the arena to an underwater setting, and they battle with their water Pokémon.
Climbing the final set of stairs, Ash finally finds Delia with the real Molly, who is sleeping. Delia is surprised to see Ash, both of them attempt to convince Molly to leave and return to reality. However, Ash is then confronted by Entei who viciously defends Molly's feelings. Forced into battle, Ash uses Totodile and Cyndaquil against Entei but the two are easily beaten. Pikachu is not as easily defeated, and puts up a valiant fight against Entei. Ash's Charizard, who had seen Ash in trouble on Liza's television earlier and decided to help, returns from the Charicific Valley to save Ash and Pikachu after Entei sends them flying. Ash then mounts Charizard as Entei engages them, and a spectacular battle erupts.
Charizard is more evenly-matched against Entei, and the two Pokémon throw everything they have at each other. At one point, Ash again tries to talk Entei out of fighting to do what's best for Molly, but Entei persists. Just as Entei is about to unleash a powerful blast at point blank range to finish Charizard off, Molly stops him, and decides she wants to live in reality again.
However, the Unown start to lose control of their combined Psychic powers after having fed off so much of Molly's feelings. Entei is forced to attack his creators in order to restore peace. With help from Pikachu and Charizard, Entei manages to penetrate the Unowns's shield and then stops their spell by hitting them with a Fire Blast. Entei bids farewell to Molly, telling her to keep him close in her dreams as he fades away. The Unown return to their dimension, releasing Professor Hale into the ruins he disappeared from. The group go outside and find that Greenfield has returned to normal. Team Rocket, trapped up in a tower with Wobbuffet for the duration of the movie, announce that they can attempt to be heroes next time and bid farewell with a cry of "Team Rocket's fading out again!"
In the credits, Charizard leaves to return to Charicific Valley, and Molly acquires a real Teddiursa along with the return of her mother and father.
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