Seven-year-old Moon Shadow Lee lives and works on his family farm in China in 1903. Moon Shadow has never met his father, who left to work in America, and he constantly pesters Mother to tell stories about his dad, the master kite-maker.
Windrider, his father, sends for Moon Shadow to come to America and live with him. When Moon Shadow arrives, his father introduces him to their all-male family abroad: the proud leader Uncle Bright Star, the chef White Deer, the poet Lefty, and Hand Clap, the exaggerator. These men are referred to as the Company since they live and run a laundromat together in the Tang people's village in San Francisco, California.
On Moon Shadow's first night in America, "white demons" (white Americans) throw a brick through the storefront window, shattering glass. This events sets the story's backdrop of American xenophobia (dislike or fear of foreigners). Upstairs in their room, Windrider shares his most precious dream with Moon Shadow. In this dream, Windrider helps heal the mighty King Dragon, who tells Windrider that he will return to his true form as a dragon if he passes the tests he is given as a human in this life. Windrider shows Moon Shadow all of the electronic gadgets he's fiddled with and tells his son that he wants to build an airplane and fly. Uncle Bright Star insists Windrider is crazy.
Moon Shadow settles into his new life and goes with Windrider to collect and deliver laundry when he's not in school or doing other chores. Windrider helps fix a demon's automobile; the demon respectfully introduces himself as Mr. Alger.
Trouble comes in the form of Black Dog, Uncle Bright Star's delinquent son. Windrider and Moon Shadow find him outside an opium den and save him from being shot by the Justices, the corrupt neighborhood watchmen. But, one day Black Dog beats Moon Shadow up in order to steal the money Moon Shadow has been collecting from laundry customers. Windrider vows to avenge his son and goes to the Sleepers – basically an underground gang – to have a one-on-one fight with Black Dog. Moon Shadow follows. Though Black Dog pulls some shady tricks, Windrider and Moon Shadow come out the winners, but they have killed a man in self-defense. To escape the wrath of the dead man's family, Windrider plans for he and his son to work for Mr. Alger and leave the Tang people's village. The Company warns them of the dangers of living among the demons and gives them parting gifts.
Moon Shadow and Windrider move into a stable behind Miss Whitlaw's boarding house. Moon Shadow likes Miss Whitlaw, even though she is a demoness. After all, she has a cool dragon stained glass window and a stereopticon (a kind of 3D slide projector). Robin, Miss Whitlaw's niece, plays the piano and the ladies sing songs for the Lees. Moon Shadow starts to use his half hour of his free time each day to visit Miss Whitlaw, bringing the gift of jasmine tea.
The neighborhood demon boys are cruel to Moon Shadow, ridiculing his English; he becomes scared of leaving the stable and going to the outside water pump at night. However, Robin is a good friend and shares her dime novels with Moon Shadow, and in return Moon Shadow impresses Robin with dragon stories and airplane knowhow.
Moon Shadow asks Miss Whitlaw for help in composing a letter to the Wright brothers (the Americans credited with inventing the airplane) to ask them about plane specifics to help Father. Though Windrider is too proud to accept help at first, soon he starts to use the letters and diagrams as lessons for his glider model building. Moon Shadow, Windrider, Robin, and Miss Whitlaw go to the sand dunes to test out one of the glider models.
Sensing that he fears the neighborhood boys, Robin tells Moon Shadow that the leader, Jack, is afraid of being punched in the nose. So, obviously, Moon Shadow goes out and punches Jack, which seems to earn him the bully's respect. Go figure.
The Feast of Pure Brightness happily reunites the Lees with the Company, but then the San Francisco earthquake of 1906 erupts and the city falls apart. Miss Whitlaw rallies up neighbors to look for survivors, with Robin and the Lees helping. Maisie and Jack are lost and not found. The fire at Market is announced and the neighbors panic.
The Whitlaws and the Lees go to Golden Gate Park. Lefty is there and asks for Windrider to help convince Uncle to leave the Company building. They return to Miss Whitlaw's to help her pack up possessions, and then the Lees leave with Lefty to collect the Company and set up camp at the Park. The Whitlaws dine with the Company, and it's not as awkward as any of them expect it to be.
As the fires die down, soldiers come around herding Chinese people and making them march in circles around San Francisco, unjustly refusing to let the Tang people return to the remains of their town. Uncle and the other community leaders strike a deal with the authorities and the Tang community together rebuilds the village.
Windrider announces his desire to pursue his dreams of flying, selfish though Uncle accuses him of being. Moon Shadow volunteers to help Windrider however he can. The two move to a stinky barn in Oakland, and Moon Shadow gets work as a grocery delivery boy. Moon Shadow's mother and grandmother write, with Mother begging Moon Shadow to give Father all the support he needs. Grandmother, on the other hand, thinks Windrider is nuts.
Windrider works super hard and eventually builds a functional airplane that he and Moon Shadow paint like a dragon; they name the airplane Dragonwings. All plans are in order for the first flight, except Black Dog comes and threatens to kill Moon Shadow if the Lees don't hand over their savings. Windrider gives up the money. So, even though Moon Shadow is alive, he and his father are bummed that all they've worked for is obliterated this late in the game. They vow to rebuild their resources and try again.
The next morning, the Company arrives and loans Windrider lots of money. The Company helps the Lees pull Dragonwings up the hill, and the Whitlaws arrive just in time. Windrider flies Dragonwings to everyone's joy, but the frame snaps, leaving Windrider with a broken leg and ribs. He realizes that, now that he's achieved his dream of flight, family is a more important dream to him.
The Company offers Windrider partnership in the laundromat, which allows him to apply for Mother to come to America. Father goes to China to bring Mother to America. Moon Shadow sits with Robin and marvels at his luck. Laurence Yep closes the book with an afterword that speaks of the true story of Fung Joe Guey on which Dragonwings is based.