After leaving work one afternoon near his home in the Snake River Valley in Idaho, Billy Coleman spots a Redbone Coonhound in a fight with other neighborhood dogs. He chases the other dogs away and takes the coon hound home with him so he can nurse it back to health. Once he does, he sets it free knowing that, from personal experience, the dog will find its way back home.
The whole experience reminds Billy of his childhood growing up in the Ozark Region of Oklahoma. He wants a dog, and his parents offer to get him a puppy from a neighbor's litter. Billy is very specific with his wishes, however, and tells them he wants two coon hounds but his parents tell him that they can't afford them. One day, Billy comes across an advertisement in a sportsman's magazine for a kennel in Kentucky which breeds Redbone coon hounds and each one costs $25. Determined to get his dogs, Billy goes to work performing odd jobs such as selling vegetables to local fishermen and manages to make and save the $50 he needs with the help of his grandfather. However, since it took so long to save up the money, Billy is told that everything might be different and his grandfather writes ahead to the kennel to see if they would honor the ad. Not only do they do so, but the price of the dogs came down by $5 each and the two puppies will only cost $40.
There is one catch, however. Since the postal service does not deliver any living being, Billy's dogs are to be delivered to the freight depot in Tahlequah. Since the family is poor and does not have transportation of any sort, Billy is left to find his own way to get to the depot and chooses to do so "as the crow flies", which is straight through the hills. It takes some extra time, but Billy makes it to the depot and leaves with one boy puppy and one girl puppy. He also decides to buy something nice for each member of his family with his extra ten dollars before heading back home; to this end, he buys a pair of overalls for his father, a bag of candy for his sisters, and some cloth for his mother so she can make dresses.
On the way back home, he spends the night in Robber's Cave on Sparrow Hawk Mountain. There he builds a fire and plays with the puppies. While trying to sleep, he hears a noise that at first seems like a woman screaming, but he soon realizes it is really that of a mountain lion from far away. The boy puppy runs to the mouth of the cave and tries to challenge the devil cat. Billy worries for them, and he remembers that his father told him, "Mountain lions are scared of fire," so he makes one and waits for morning. In the morning, he continues on. He comes to a sycamore tree and sees the names Dan and Ann carved inside a heart in the bark and decides to name the puppies Old Dan and Little Ann.
To train his dogs, Billy catches a raccoon with the help of his grandfather and uses its fur to teach them how to hunt one. During their training, their personalities become apparent: Old Dan is brave and strong, while Little Ann is very intelligent. Both are very loyal to each other and to Billy. Old Dan has the brawn and Little Ann has the brains.
On the first day of the hunting season, Billy takes his dogs out for their very first hunt. He promises them that if they tree a raccoon, he will do the rest. They are very ready to chase their first one in a large tree, which Billy had before nicknamed "The Big Tree", and is one of the largest in the woods. As he tries to call his well-trained dogs off the hunt, they look at him sadly and he cuts the enormous tree down to keep his promise—an exhausting effort that takes him a few days and costs him blistered hands. In the end, when he's about to give up his effort, Billy offers a short prayer for strength to continue. Mysteriously, a strong wind starts to blow and the tree comes crashing down. Old Dan and Little Ann take the raccoon down.
Billy, Old Dan, and Little Ann go out hunting almost every night. As months go by, he brings more fur to his grandfather's store than any other hunter, and the stories of his dogs spread throughout the Ozarks. One day, he and his grandfather make a bet with Rubin and Rainie Pritchard, that his dogs can catch the legendary "ghost coon." The Pritchard boys set out with him to see if Old Dan and Little Ann can do so. It leads them on a long, complicated chase, and the Pritchard boys want to give up. But Billy is determined. Finally, when they have it treed, Billy refuses to kill it. Just as Rubin starts to beat him up, Old Dan and Little Ann begin to attack the Pritchards' dog, Old Blue. Rubin runs to attack them with an axe, but he falls on it and kills himself. Billy is very distraught afterward. Finally he goes to Rubin's grave with some flowers, then feels much better.
A few weeks later, Billy's grandfather enters him into a championship raccoon hunt, putting him against experienced hunters and the finest dogs in all the country. Before it starts, he enters Little Ann into a contest for the best-looking dog, where she wins and is given the silver cup. On the fourth night of the hunt, Old Dan and Little Ann chase three raccoons, making it to the final round. The sixth night, they chase one before a blizzard hits. Billy, his dad, grandfather, and the judge lose sight of them. When they finally find them, Billy's grandfather falls and sprains his ankle which prevents him from walking. They build a fire, and when Billy's dad chops down a tree, three raccoons rise. The dogs take down two of them, and chase the third one to another tree. In the morning, the hunters find them covered with ice circling the bottom of a tree. The last raccoon wins them the championship and the gold cup. The hunters also present them with $300 of jackpot money.
Billy's mother and sisters are overjoyed. He keeps up his hunting. One night, however, his dogs tree a mountain lion. Old Dan howls defiantly, and it attacks. Billy is horrified, and with his axe he enters the fray, hoping to save his dogs, but they end up having to save him. Eventually, they defeat the mountain lion, but Old Dan is badly wounded, and Billy soon finds his intestines in a bush. He dies the next day. Billy is heartbroken, and Little Ann loses the will to live, stops eating, and dies of starvation a few days later on Old Dan's grave. Billy's father tries to tell him that it is all for the best, because with the money they received from winning the championship raccoon hunt, they hope to move to town. He does not completely recover until on the day of the move. He goes to visit his dogs' graves and finds a giant red fern between them. According to Native American legend, only an angel can plant one. He and his family look at it in awe, and he feels ready to move on knowing that his dogs are always going to be remembered.