The film is based on the true story of the Cottingley Fairies. In the summer of 1917, Frances Griffiths (then ten years old) and her cousin Elsie Wright (then sixteen years old) were living with Elsie's parents in the town of Cottingley in West Yorkshire. Using Arthur Wright's camera, the girls took a series of pictures of themselves with fairies in the nearby woodland brook of Cottingley Beck. (The woodland scenes in "FairyTale: A True Story" are filmed in Cottingley Beck, the actual location where Frances and Elsie supposedly encountered the fairies in 1917.) The photographs became public in 1919 (not during World War I, as depicted in the film), when Elsie's mother gave the photos to Edward Gardner, President of the Theosophical Society of Bradford. Sir Arthur Conan Doyle published the photos with an article on spiritualism in "The Strand" Magazine in December 1920. Opinions over the authenticity of the photos were divided. Several photographic experts examined them and pronounced them "genuine," while other photo experts found "evidence of fakery." (A few experts who examined the photos noted that the "fairies" had "Parisienne-style haircuts," which were popular in the day.) In the end, no real harm came from the photos. The two girls never accepted any money for them, or tried to swindle anyone with their claims of fairy encounters. Years later, as adults, the girls admitted they had faked the photos using cardboard cutouts of fairies taken from a children's book. Elsie explained that they were too embarrassed to admit the truth about the photos after Sir Arthur Conan Doyle, the legendary creator of Sherlock Holmes, accepted them as genuine. However, Frances insisted until her death that at least one of the "fairy photos" was real. Frances died in 1986, and Elsie died in 1988. The original photos, and the cameras the girls used to take them, are now in the National Media Museum in Bradford, England.
Peter O'Toole played Arthur Conan Doyle in the film. He previously played his most famous creation, Sherlock Holmes, in Sherlock Holmes and the Sign of Four (1983), Sherlock Holmes and the Valley of Fear (1983) and Sherlock Holmes and a Study in Scarlet (1983).
Harvey Keitel had previously been attached to play Harry Houdini in the film Ragtime, but he was recast. However, as he had already done lots of research in preparation for that film, he was able to incorporate it into playing Houdini in this one.
Both Florence Hoath and Elizabeth Earl got to meet the daughter of the real Frances Griffiths, Christine Lynch, who was involved with the film's production. Like her mother, she believed the fairies were real too.