Peter and the mermaids are playing with an enchanted bubble ball at Mermaid Lagoon. On the shore, Wendy teaches one of the Lost Boys about Morse code by using a mirror to demonstrate the signal for SOS. Soon the two vain mermaids are arguing over who is the most beautiful being in Neverland. They ask Peter to settle the dispute; he picks Wendy because she tells beautiful stories.
Wendy is flattered but brushes off his judgment as false since the mermaids are obviously more beautiful. But the damage has already been done: the mermaids grow so jealous that they trap Wendy in a bubble after Peter leaves and drag her down to the bottom of the lagoon. They then use a magic potion to give Wendy a mermaid's tail, claiming that someone so beautiful must live amongst the mermaids. Wendy is enchanted with her new tail until she realizes that she cannot breathe underwater. Her bubble slowly starts to shrink and Wendy begins to suffocate.
Meanwhile, Peter and the Lost Boys can't find Wendy anywhere, so they return to the lagoon to look for her. A friendly mermaid gives Peter a breathing bubble and directs him to where Wendy might be. On the way, he meets an old and ugly mermaid named Old Crooked Tail. Apparently she was once a beautiful princess who made a beauty potion to enhance her looks. The potion backfired horribly on her - as a result of her vanity she now lives as an outcast. Crooked Tail agrees to help Peter find Wendy after learning which two mermaids abducted her (she particularly dislikes them).
Wendy tricks the mermaids into believing that the mirror she dropped on the beach is a magic mirror. She claims Peter gave it to her and that it made her the most beautiful being in Neverland after she looked into it. The two race out of the cave to claim the mirror moments before Peter and Crooked Tail arrive on the scene. Old Crooked Tail reverses the potion just before Wendy runs out of air and delivers her and Peter safely back to the shore. The two mermaids are so stunned by their arrival that they drop the mirror they were fighting over. Peter passes the mirror to Crooked Tail and Wendy proclaims her to be the most beautiful being in Neverland. Crooked Tail then announces (to the dismay of the other two mermaids) that she is ending her seclusion and moving back to her old home.