While exploring a cave, Peter, Slightly, and John open a treasure chest that contains the ghost of Captain Patch (a.k.a. Jaspar Hook). Patch's ghost has grown powerful enough to summon his old ship The Rake from beyond to help him exact revenge on his younger brother James for murdering him years ago. The evil ghost won't stop at destroying Hook and the Jolly Roger – all of Neverland is at risk. To survive this threat, Peter Pan and Captain Hook must combine forces and banish Patch forever.

Peter joins Hard-to-Hit and Tiger Lily in a journey down the Mysterious River to seek out an ancient golden arrow. Hook and the Pirates pursue them through a series of perils along the way.

Everyone is awestruck at the appearance of three moons above Neverland. Tinker Bell is especially thrilled, for this gives her the ability to shrink Peter down to fairy size and take him to visit the Fairy King. But she's not too happy when Peter insists that the Darlings and the Lost Boys come along. Tink messes with the others' ability to fly, which leads to such disaster that King Oberon kicks Wendy and the boys out. With the children unable to revert to their former size, they become easy prey for the pirates and the Crocodile, especially since Tink is keeping Peter distracted.