The Lost Heir continues the story of five dragonets — Tsunami, Clay, Starlight, Glory and Sunny. Stolen as eggs by a secret group named the Talons of Peace, the dragonets were kept as prisoners and trained in order that they may one day bring peace to the land.
In a prologue, Webs, a dragon who'd served as teacher and jailor of the dragonets, must admit to having lost them to Queen Scarlet of the SkyWing dragons. The other members of the Talons of Peace attempt to kill him, but Webs escapes.
The dragonets have escaped from the SkyWings. Tsunami, a SeaWing dragon like Webs, is anxious to return to her home under the water. She hopes her dragonet friends will follow her, but they are conflicted. Some want Starflight, a NightWing dragon, to be their leader.
When a SkyWing patrol approaches, the dragonets hide. Tsunami, afraid that one of her friends has been spotted, attacks one of the patrol dragons, knocking him into the water. Not wanting to kill him, she carries him to shore. The dragonets secure him under a heavy tree so he can't escape, and then set out in search of Tsunami's family in the ocean.
After several days, Tsunami and her friends encounter Riptide, a SeaWing dragon on patrol. He leads them closer to the Summer Palace of the SeaWings. They encounter Shark, the commander of the palace guard. Tsunami insists her friends not be killed, and they are eventually given access to the Summer Palace.
Tsunami is thrilled to finally meet her mother, Queen Coral, and is surprised to learn she has a little sister, Anemone. The queen orders the other dragonets to be placed in a cave for their protection, while Tsunami is given pearls and taught more about her mother's kingdom. The body of Kestrel, one of the dragonet's jailors, is found on a nearby island. Tsunami fears the SeaWings will think she and her friends had something to do with Kestrel's death, so keeps quiet about what she knows. Later, in a meeting of Queen Coral's various counselors, Tsunami learns that a dragon she was forced to kill in Queen Scarlet's arena was actually her father. She doesn't admit she killed him, but does tell Queen Coral that her husband is dead.
Her mother's favorite teacher, Whirlpool, tries to instruct Tsunami in Aquatic, the optical language of the SeaWings. Bored by his teaching methods, Tsunami leaves the lesson and runs into Riptide, who offers her a more practical lesson in Aquatic.
On her way back to the palace, she is attacked, barely managing to escape. Queen Coral fears for her last two eggs. When they search the royal hatchery, one of the dragon eggs has been broken and the dragonet killed. Tsunami insists that she be allowed to protect the remaining egg, even though it means her death if something should happen to it.
Above the water, a great storm is raging, and Tsunami learns that the caves of the Summer Palace often flood. She worries about her friends left in the Summer Palace while she has been in the Deep Palace, safe under the sea. She braves the storm to return to them and discovers them piled together in a soon to be flooded cave.
Clay, who is a MudWing — the SeaWings' archrivals — has been chained to the cave and can't escape. Tsunami finds the guards and convinces them to give her the key to Clay's chains. She guides her friends to a higher cave and finds food for them to eat. She also asks Sunny, the SandWing dragonet, to care for the dragonet egg. Sunny's natural warmth should be enough to help the egg to hatch. Tsunami feels guilty because she realizes she feels more at home and safe with her friends than with the tribe of SeaWings she will one day rule.
Queen Blister, a rival for the SkyWings' throne, arrives at the Summer Palace to meet with her friend Queen Coral. Tsunami doesn't trust Blister. She and her friend Starflight soon realize that Blister may have had something to do with Kestrel's death, but Starflight cautions Tsunami not to speak of it yet. Blister asks how Queen Coral's "secret weapon" is doing, and Coral offers a private demonstration.
Anemone insists that Tsunami be able to attend as well. Anemone is asked to move a pearl necklace across the wall, which she does successfully without touching it. Tsunami realizes her sister is an animus, a dragonet with magical powers. Anemone claims that Blister wants her to learn how to enchant a spear to kill the rival queen and cause their enemy's caves to collapse. She fears that if she tries anything too big, she will lose her mind, as other animus of the past have done.
Webs is discovered hiding in the canopy of trees above the Summer Palace. He begs for mercy from Queen Coral but says she is free to punish him as she desires for stealing Tsunami's egg. He explains he'd only been working for the good of the land and hope for the prophecy's fulfillment.
Coral throws him and his son, Riptide, into prison, planning to kill them in a public display. Blister convinces Coral that the threat to her last dragonet egg is over and that it should be returned to the hatchery. Tsunami is sure the egg is still in danger and insists she be allowed to guard it in the hatchery.
As Tsunami watches over the egg, a giant statue of a dragon comes to life. After battling it, Tsunami manages to pin it to the floor with a spear. She believes that Orca, the princess the statue depicts, must have been an animus. She had left the statue behind to kill the other royal dragonets.
The baby dragon hatches from its shell, and when Tsunami helps it out of the hatchery, the statue of Orca refreezes. The following morning, Queen Blister convinces Queen Coral to keep the dragonets of destiny prisoner in the Kingdom of the Sea, for their own protection. They are kept in a cell, surrounded by deadly electric eels.
Anemone sneaks in to try and help the dragonets escape. She uses her magical powers to enchant a spear to find the dragon that tried to kill Tsunami. The spear returns with Whirlpool, Queen Coral's favorite teacher.
Whirlpool admits to attacking Tsunami because he hopes to one day be king by marrying one of the princesses. He thought Anemone would be a more subservient wife. Anemone accidently hits him into the electrified moat where eels set upon him.
Starflight explains that the charged waterfall around their cell may now be turned off, since the eels have expended their electricity. Tsunami risks her life to set her friends free. Then she sends Anemone back to Queen Coral, so no one will suspect she aided the dragonets escape. Once her friends are free, they seek to release Riptide and Webs as well. Before they can find their friends' cell, SkyWing dragons firebomb the Summer Palace.
Tsunami finds them and helps Riptide and Webs escape. Riptide admits to helping The Talons of Peace, but says it was only to find out information about his father. Crocodile, a dragon that had helped Webs escape earlier, appears in the mouth of the prison cave. She confesses that she betrayed the Talons of Peace and has joined the SkyWing dragons. She helped Webs escape so she could learn the location of the SeaWings' secret Summer Palace. She plans on taking the dragonets back to the SkyWings as prisoners.
Glory uses her venomous spit to kill Crocodile. The dragonets escape the battle and head back toward land with a wounded Webs in tow. Riptide stays behind to help protect his home. The dragonets take refuge on the land. They decide to try and find Glory's family in the rainforest. They hope the RainWings might have an antidote for the poison killing Webs. As they rest for the night, Tsunami hopes for the well-being of her family and realizes that her home is no longer in the Kingdom of the Sea. She wonders if she'll ever find someplace to call home.
In an epilogue, Queen Blister plots with a NightWing dragon named Morrowseer and a SeaWing dragon named Nautilus. Nautilus, a former member of the Talons of Peace, explains that there is a group of replacement dragonets that have been kept secret, in case the original dragonets of destiny fail. Blister and Morrowseer plot the demise of Tsunami, Glory and Starflight, hoping they still may be able to use Sunny and Clay to their advantage.