The Coloured Pencils is an insight into a child's world. Annie, the main character, is an eight year old.

Annie is poor, unlike the prissy, spiteful Wendy who displays her pristine set of 72 Derwent pencils with gay superiority. When Annie is pushed on to Wendy in the long grass, Wendy drops her pencils and this gives Annie the opportunity to take something she always wanted, 72 Derwent pencils. Annie's conscience gives her no rest and when she throws them into the creek, something awful and unexpected happens. . . they don't sink!

The film is based on the popular children's story 72 Derwents by Kay Arthur, a Melbourne author whose stories for children have been marketed internationally. It is a story which the young identify with because of the engaging narrative and the child's eye view, and through which adults find they can rediscover their own childhood experiences.