As the narrator tells us, the action about to take place "has happened before, and will all happen again", only now it will happen in Edwardian London in the neighborhood of Bloomsbury, where George and Mary Darling's preparations to attend a party are disrupted by the antics of the boys John and Michael, acting out a story about Peter Pan and the pirates, told to them by their older sister Wendy. Thomas the Tank Engine, Twilight Sparkle and their friends arrived at their home and they joined the children to their game. The father angrily declares that Wendy has gotten too old to continue staying in the nursery with them, and it's time for her to grow up. That night they are visited in the nursery by Peter Pan himself, who teaches them to fly with the help of his pixie friend, Tinker Bell, and takes them with him to the island of Never Land.
A ship of pirates is anchored off Never Land, commanded by Captain Hook with his sidekick Mr. Smee. Hook boldly plots to take revenge upon Peter Pan for cutting off his hand, but he trembles when the crocodile that ate it arrives; it now stalks him hoping to taste more. The crew's restlessness is interrupted by the arrival of Peter and the Darlings and Thomas, Twilight and the others. The children and the others easily evade them, and despite a trick by jealous Tinker Bell to have Wendy killed, they meet up with the Lost Boys, six lads in animal-costume pajamas who look to Peter as their leader. Thomas, his friends, John and Michael set off with the Lost Boys to find the island's Indians, who instead capture them (except for Thomas and friends), believing them responsible for taking the chief's daughter Tiger Lily.
Meanwhile, Peter takes Wendy, Twilight and their friends to see the mermaids, where they see that Hook and Smee have captured Tiger Lily, to coerce her into revealing Peter's hideout. Thomas and his friends arrived to the Lagoon to tell them that boys were kidnapped by the Indians and they go with Peter, Wendy, Twilight and the others to free her, and Peter is honored by the tribe. Hook then plots to take advantage of Tinker Bell's jealousy of Wendy, tricking her into revealing the location of Peter's lair. Wendy, her brothers, and Thomas, Twilight and the others eventually grow homesick and plan to return home. They invite Peter and the Lost Boys to return to London and be adopted by the Darling parents. The Lost Boys agree, but Peter is so set against growing up that he refuses, presumptuously assuming that all of them will return shortly. The pirates lie in wait and capture the Lost Boys, the Darlings, Thomas, Twilight and the others as they exit, leaving behind a time bomb to kill Peter. Tinker Bell learns of the plot just in time to snatch the bomb from Peter as it explodes.
Peter rescues Tinker Bell from the rubble and together they confront the pirates, releasing the children and our heroes before they can be forced to walk the plank. Peter engages Hook in single combat as the children, Thomas, Twilight and the others fight off the crew, and finally succeeds in humiliating the captain. Hook and his crew flee, with the crocodile in hot pursuit. Peter gallantly commandeers the deserted ship, and with the aid of Tinker Bell's pixie dust, flies it to London with the children and Thomas, Twilight and the others aboard. However, the Lost Boys decide to return to never Land rather than be adopted in London.
Mr. and Mrs. Darling return home from the party to find Wendy not in her bed, but sleeping at the open window; John and Michael are asleep in their beds. The parents have no idea that the children and the others have even been anywhere. Wendy wakes and excitedly tells about their adventures. The parents look out the window and see what appears to be a pirate ship in the clouds. Mr. Darling, who has softened his position about Wendy staying in the nursery, recognizes it from his own childhood, as it breaks up into clouds itself.
- This movie marks the first appearances of Gordon, Henry, Edward, Apple Bloom, Sweetie Belle, Scootaloo and the newest member of the teams Heckle and Jeckle who will be joining Thomas, Twilight Sparkle and their friends at the end of the film.
- Captain Hook and Mr. Smee will be getting revenge on Thomas, Twilight Sparkle and their friends in Thomas and Twilight Sparkle's Adventures of Pokemon Ranger and the Temple of the Sea.