The film tells the story of Maja and Nikulás meeting and how they develop a friendship when she starts to visit him regularly. This worries Bergur, Nikulás' son, especially after he learns that his father intends to leave the girl an inheritance, a Chinese vase. Bergur takes action, and the short-lived adventure ends in a more tragic way than is usually the case in fairy tales.

A young couple moves into an old house. She teaches deaf children, he is a musician, working on his own compositions. Their separate worlds, one silent, the other full of sounds, create a vivid pattern of contrasts, which affect their emotional lives and their living together. From the time they move into the house, they are strangely aware of something odd, especially she, while he concentrates more and more upon his work. A series of incidents adds to her growing uneasiness about the house. Its past seems to creep in on her. She feels as if some tragedy must have befallen the people that lived there before, but when she starts asking around she gets few answers. There is something about the house that seems to be on the verge of overpowering her - something that in an unexpected way is related to her origins and permanently affects her life and destiny.

"Síðasti bærinn í dalnum" is in the spirit of old folktales, a classic fairy tale about the struggle of good and evil. In the countryside, all the farmers have fled because of pestering trolls. One farmer, however, holds his ground with his family as the grandmother keeps a magic ring that protects the inhabitants from all evil. The trolls try to steal the ring and thus set in motion a series of events where forces of evil, a dwarf who can make himself invisible and an elf queen come to light.