The legend of the Knights of the Iron Dagger went back 1,000 years ago back to the Dark Ages when they were not only witch-hunters, also exterminators of supernatural creatures. Their sole purpose was to "keep the world pure of the magical". All other monsters and spellcasters were retreated to another dimension that would then become Halloweentown to evade capture and destruction at the hands of the Knights. As for the order of the Knights that were slowly losing members over the years, would always stay ready to defend mankind from those that were different.The only way to tell the identity of the Iron Knights was not from their usual iron knight armors, but from their fabled Iron Dagger Rings each member wore as part of the order as well as their legendary Iron Dagger Knives which served as an instrument of fear against all magical creatures.
The Return of the Iron Knights
The Knights of the Iron Dagger mysteriously returned when news of the children of the Halloweentown Council appeared and arrived in the Mortal World under the Cromwell Family's protection.
The Halloweentown students consisted of an unnamed witch, Ethan Dalloway, Jessica, Pete, Chester, Natalie, an unnamed fairy, Zachary, Bobby, and Cassie arrived. They were magically given human appearances to disguise their true non-human natures. School began with Marnie acting as tour guide for the exchange group ("from Canada"); Aggie substitute taught so she could be available in case of need. Cody, a new student, showed a romantic interest in Marnie, and a possible threat to the school from the Knights of the Iron Dagger. She encouraged the kids to join sports teams and clubs.
While Aggie proved unable to teach any subject effectively (she kept letting her magic take over: she conjures up a parrot in science class, and later we learned that a llama was produced, one kid was turned into a lamp post, and another lost one of their ears), the Halloweentown students kept to themselves, and hid in the refuge that Aggie had magically created for them in a remote student locker. Marnie gradually encouraged the kids to join school activities and make new friends.
Marnie's progress was interrupted by a warning that appeared to be from the Knights of the Iron Dagger, then by a magical incident at the mall that resulted in the Halloweentown students assuming their natural appearances, a break-in at the secret magical locker, and finally, by the disappearance of one of the students: Cassie, a witch.
Meanwhile, Marnie's developing relationship with Cody paralleled an unexpected romance that began between Aggie and the school's principal, Phil Flanagan. Aggie suspected Cody of being the cause of the trouble, and tried to convince Marnie to halt their relationship, but Marnie in turn, suspected Flanagan. They eventually discovered that Flanagan was the Knight in question; he was told prior to the students' arrival that he was the last of the Order.
Edgar Dalloway, head of the Halloweentown Council and the father of Ethan Dalloway, was the real root of their problems. He wanted to keep Halloweentown isolated from the Mortal World, and used Flanagan to ensure the failure of Marnie's project. That, he hoped, would cause a negative reaction in Halloweentown and keep the portal between Halloweentown and the Mortal World closed forever.
The Halloweentown students use the school's Halloween Carnival to improve mortal attitudes toward magical folk. Their haunted house depicted the ordinary lives of creatures that had typically been seen as monsters in the Mortal World, including displays like the "Monster Tea Party" and ogres "picnicking in their natural setting", and winded up boring the carnival goers. Gwen, meanwhile, uses a witch's glass to hunt down Cassie whom Dalloway imprisoned in Ethan's witch's glass.
At the school Halloween Carnival, Edgar Dalloway launched magical attacks against the mortal students by bringing the inanimate monsters in the haunted house to life. The ensuing damage and panic spiraled beyond Marnie's and Aggie's ability to contain them, including a reanimated skeleton which grew 30 feet tall. Flanagan incited a mob to corner the Halloweentown students. Cody shamed the crowd, the students revealed themselves, and the crowd accepted them for who they were. Flanagan also renounced being a Knight, threw away his ring, and accepted Aggie.
Dalloway claimed the Cromwell Magic, but Gwen, accepting her magic abilities, had shown the evening's events to the Halloweentown Council. They returned the Cromwell Magic, Gwen returned with Cassie whom Dalloway had imprisoned, and the Halloweentown Council imprisoned Dalloway in another witch's glass considering that his resignation (at that point the series diverged from real history quite dramatically, with the existence of Halloweentown and its inhabitants becoming known to the population of Earth).
The portal between Halloweentown and the Mortal World opened in the middle of the haunted house, and crowds of kids from Halloweentown crossed over to enjoy the carnival together with the Mortal World kids. Marnie flew off for a romantic broom ride with Cody and, while flying over the carnival, they kissed.