The Carpet People is basically Lord of the Rings on a carpet. A much condensed, and funnier, Lord of the Rings on a carpet. The story takes place among the hairs of the Carpet, where the miniscule Munrungs, a peaceful tribe of simple nomads, have just gotten their village destroyed by the terrible Fray - a destructive force that strikes without warning from the above. The survivors, led by the brothers Snibril and Glurk, Pismire the shaman, and the warrior Bane, set out on a journey across the Carpet in search of safety. On their journey, the heroes visit some of the more impressive places on the Carpet, including a dropped penny (the major source of metal on the Carpet), and a matchstick (the major source of wood), and they encounter some interesting Carpet inhabitants (a termagant, some pones, the wights, and Brocando, the king of the Deftmenes, to mention but a few). The story culminates in an epic battle against the evil mouls. The mouls can sense when Fray is about to strike, and have learned to take advantage of the resulting destruction and confusion to attack and enslave the inhabitants of the Carpet. The benevolent Dumii empire, which dominates the Carpet, is thus about to fall.
Pratchett originally wrote this story when he was 17 (and he got it published). But after the Discworld success, fans started clamoring for this early, and largely unknown, work, which meant it was time for a reissue. And time for a rewrite, as, according to Pratchett himself, the story "had a lot of things wrong with it, mostly to do with being written by someone who was seventeen at the time." I haven't read the original story, so I can't compare this version to the earlier one, but judging from what Pratchett says in the author's note, there are some large differences.
The Carpet People is perhaps aimed at a more younger audience, but I still think the story is too brief. Much more could have been made of the setting (this is, after all, a carpet on a floor somewhere we are talking about), and there sometimes seems to be large gaps in the story. The pace is also much too hurried, with a resulting lack of detail. Some of the things alluded to or mentioned in the story are never really explained (although this is characteristic of Pratchett), for example, it's never really clear what the destructive Fray is (I got the impression that it's someone walking across the Carpet, which would mean that time for the Carpet dwellers flow much faster than what it does for us). All this said, The Carpet People is still an interesting and entertaining story, containing trademark Pratchett observations and humour. For fans of the Discworld, this early sample of the master's work is, of course, essential reading. The Carpet People is, after all, Pratchett's first published novel.