In a quaint English inn, young Jim Hawkins shares his everyday life with his steadfast friends, Gonzo and Rizzo. Their existence takes a whimsical turn with the intriguing tales spun by Billy Bones, who tells them about the notorious Captain Bernie Flint, a merciless pirate known for burying his treasure on a secluded island and slaughtering his crew to keep the coveted map to the loot hidden away. One stormy night, Blind Pew arrives, delivering the ominous black spot to Bones, foretelling his imminent demise. As Bones draws closer to his end, he urgently urges Jim to embark on a formidable quest to secure the treasure and protect it from the grasp of a one-legged foe of ill repute.
Chaos ensues when a horde of pirates storms the inn, leaving nothing but destruction in their path. In this frenzy, Jim, Gonzo, and Rizzo manage to escape with the dangerous map, setting them on a thrilling adventure.
Seeking guidance, they turn to Squire Trelawney (Fozzie Bear), a well-intentioned yet somewhat muddled nobleman. The trio finds themselves enlisted as cabin boys on the ship Hispaniola, where they meet Dr. Livesey (Bunsen Honeydew), Beaker, and Captain Abraham Smollett (Kermit the Frog), a seasoned naval officer, along with his stern first mate, Mr. Samuel Arrow ([Sam Eagle]). Among the crew is the ship's cook, Long John Silver, the one-legged rogue who becomes an unexpected ally to Jim, whose innocence and goodness starkly contrast Silver's devious nature.
As they set sail, Captain Smollett begins to mistrust his crew, particularly after Gonzo and Rizzo mysteriously disappear at the hands of three crew members who are secretly pirates. This prompts Smollett to lock away the treasure map, striving to safeguard it from potential threats to their voyage's success.
As events unfold, it becomes increasingly clear that Silver harbors ulterior motives. This cunning pirate and his secretive accomplices, former members of Flint’s crew, are itching to seize the treasure for themselves. Under a façade of camaraderie, Silver deceives Mr. Arrow into risking his life on the open ocean, feigning an accident before pilfering the precious map during a memorial service.
Meanwhile, Jim, Gonzo, and Rizzo uncover Silver’s duplicitous plot and hastily inform Smollett of the betrayal. With the Hispaniola in jeopardy, Smollett orders the crew to disembark, leaving only the officers to protect the ship. However, the plan backfires when Silver captures Jim, holding him hostage as leverage against Smollett.
Upon arriving at Treasure Island, the crew encounters an unexpected challenge: they are captured by the island’s native inhabitants, a tribe of pigs, and in the midst of confusion, Smollett is reunited with his former love, Benjamina "Mina" Gunn (Miss Piggy), the mysterious queen of the tribe.
As they navigate the treacherous landscape in search of Jim, they realize Flint's treasure hideout is empty, leading to a fierce struggle for power against Silver. Despite his reputation as a notorious pirate, Silver displays a surprising paternal instinct towards Jim, ultimately allowing the boy to flee. With the crew's morale plummeting, Smollett becomes a prisoner, precariously dangling from a cliff, while Mina sacrifices her dignity to reveal the treasure's location to save him—only to be met with a derisive kiss from Silver.
In a dramatic turn, Jim stages a rescue for his friends, including the seemingly resurrected Mr. Arrow, who cleverly poses as a ghost to frighten the pirates and reclaim command of the Hispaniola. With Smollett and Mina liberated, the group preps for a bold mission to rescue their captain and his jilted lover from Silver's clutches.
As battle erupts on the beach, Sweetums unexpectedly switches sides to support Smollett, leaving only Silver to face their united front. However, realizing he is hopelessly outnumbered, the cunning pirate chooses to surrender rather than fight. While the remaining pirates face justice behind bars, Silver spots an opportunity to escape, absconding with the treasure under the veil of night.
In a tense standoff, Jim confronts Silver, neither willing to pull the trigger against the other. In a moment of mutual respect, Silver leaves behind his compass as a token of acknowledgment for Jim's integrity before vanishing into the shadows. Ignorant of the dire consequences of Silver's escape, Mr. Arrow reveals that his commandeered vessel is an unsinkable deathtrap, leaving the former pirate marooned on Treasure Island’s merciless shores.
As the Hispaniola sails into the sunset, a troupe of scuba-diving rats, courtesy of the crafty Rizzo, makes off with the long-coveted treasure. The tides have turned, leading to Silver's ruin after a botched escape plan.
In a lighthearted mid-credits scene, one of the island's quirky talking sculptures bombards Silver with a cascade of corny jokes, leaving the beleaguered pirate to respond with a weary eye-roll, as if to say, > "You're a real treasure, all right."
