Several years after the events of the first film, Wendy is now grown up and married to a man named Edward and has two children, Jane and Daniel "Danny". With World War II raging, Edward leaves to fight, leaving Wendy to take care of the children. Four years later, Jane refuses to believe in stories about Peter Pan and refers to them as "childish nonsense", which leads to an argument with her mother and brother one night (after Wendy is informed and tells Jane that she and Danny, along with the other children in London, are being evacuated to the countryside for safekeeping due to the German soldiers invading the city). Later while sleeping, she is mistakenly abducted by Captain Hook and his crew, who sail through the sky on their pixie-dust enchanted ship, evade an air raid alert and escape back to Neverland.
There, Hook plans to feed Jane to the octopus (who replaced Tick-Tock the Crocodile) in order to lure Peter into a trap. However, Peter rescues Jane and Hook escapes from the octopus, returning to the ship. After recognizing and asking Jane to follow Wendy's footstep, Peter takes her to his hideout to be the mother of the Lost Boys, but Jane refuses and gets stranded. The next day as the boys fail to teach Jane about flying, she upsets them and does not believe in fairies, making Tinker Bell sick. That night, Hook tricks Jane by lying that he will not harm Peter and she agrees to help him find the treasure. Hook gives Jane a whistle to signal him when she finds it and leaves.
Jane asks Peter and the boys to play a game of "treasure hunt", and they wish Jane to believe in fairies and save Tinker Bell. As Jane finds the treasure and changes her mind into discarding the whistle, the boys make her the "Lost Girl" before Tootles finds and inadvertently blows the whistle. As the pirates arrive to capture the boys, Hook reveals Jane was an accomplice. As Jane tries to tell Peter she never agreed to anything, Peter scolds her for her treachery and tells her that Tinker Bell was knocked out by Jane's disbelief in fairies. Horrified, Jane rushes back to the hideout to Tinker Bell's body, but she revives. They head to the ship and see Hook forcing Peter to walk the plank. With Tinker Bell's help, Jane learns to fly. As Peter drops the anchor on the ship and sinks into the sea, the pirates, riding on a rowboat, are pursued by the octopus.
After saying goodbye to the boys, Peter escorts Jane back home, where Jane reconciles with Wendy and Danny. Peter and Tinker Bell meet Wendy again, though she is already an adult, and they say goodbye. As Edward returns home from the war, Peter and Tinker Bell fly back to Neverland.
