In the beginning of the movie, James is seen living with his parents in a little house by the sea, where they celebrate James' birthday and look at the clouds, where James spots the tallest building in the world, to which his father shows him a travel guide of the tallest building in the world, which is the Empire State Building in New York City, where James' father tells James that's where they're going and that there are lots of kids in the city, and New York City is a place where dreams come true. However, his parents are killed by a rhinoceros from the sky, and James is sent to live with his two evil aunts Spiker and Sponge, who abuse James and make him work day and night.
One day after James finishes chopping the wood for his aunts, he begins to look at his travel guide of New York City, when his aunts come over and snatch the travel guide away, telling him that he's never going there because he'll always live with them and that he shouldn't dream because that's what got his parents killed, and then they rip up the travel guide and order James to get back to work, or else the rhino will get him too. Later that evening, as James returns from doing his work, his aunts tell him that they've already finished all the dinner, so James steals a bag of food crumbs from the garbage to eat. As James goes into his room, he notices a spider spinning its web, and tells it that it shouldn't build its web there because Spiker and Sponge hate spiders, but he'll be its friend, and begins to sing about his dream to go to New York City ("My Name Is James" song). The next morning, Spiker and Sponge find the spider in James' room and try to kill it, but luckily, James takes it outside before they can and tells it to get away as far from this place as possible, and that he wishes he could get away too.
Afterward, James meets a wounded Confederate soldier who appears with a bagful of magic green "crocodile tongues", which look like twisty bugs and are supposed to make his life better. The soldier warns him not to lose the "tongues" and magically disappears. When James is returning to Sponge and Spiker's house, he trips, and the "tongues" fall into the root of an old peach tree, affecting it and its inhabitants in amazing ways.
A single peach is soon found on the tree, and it grows to immense proportions. Spiker and Sponge use the giant peach as an attraction, making lots of money as James, sad that they won't let him come out and play with the children, watches, from inside the house, in tears. After one night of success, James is sent to pick up garbage. While doing so, he grabs a chunk of the peach as a "crocodile tongue" enters it for him to eat. James ventures into the giant fruit and transforms into a stop-motion animated character, where he finds and befriends a group of anthropomorphic invertebrate bugs (who are all much larger than his small petite frame): Mr. Centipede, Mr. Grasshopper, Earthworm, Mrs. Ladybug, Miss Spider, and the Glowworm, who also dream of an ideal home ("That's the Life for Me" song). As they hear the aunts search for James, Centipede manages to cut the twig holding the giant peach to the tree, and the peach rolls away to the Atlantic Ocean with James and his friends inside it.
They use Miss Spider's silk to tie a hundred seagulls to the peach stem, while battling against a giant robotic shark, allowing them to fly their way to New York City. While flying, James and his friends eventually find themselves hungry, and soon realize that "their whole ship is made out of food" ("Eating the Peach" song). After gorging on the inside of the peach, Miss Spider, while using her web to tuck in James, reveals to him that she was the spider he saved from Spiker and Sponge. James then has a nightmare of him as a caterpillar being chased and attacked by Spiker, Sponge, and the rhino. When James awakens, he and his friends find themselves in the North Pole, lost and cold. It is then revealed that the Centipede has never traveled the world, and has only lived on two pages of the National Geographic. He and the Grasshopper have a fight, and the other bugs lose faith in ever reaching New York City. Grasshopper mentions that the only way they can navigate out of the Arctic is to have a compass. Centipede overhears James' mention that ships have compasses, and dives into the cold frigid waters where dozens of ship ruins are found. After finding a compass, he is captured by the haunted remains of the ship's crew, but James and Miss Spider rescue him just in time. Now knowing their way to New York, the bugs tell James that he and them are a family ("Family" song).
As the group finally reaches New York City, a storm brews and blows the compass away. James tells everyone to climb onto the peach stem and hold onto the seagull strings. The rhino appears riding with the clouds, and James learns to face his fears before the rhino strikes the peach with lightning before it disappears. He falls into the peach, and the bugs fly away from it. James coughs up the "crocodile tongue" and returns to his live-action form, later finding out that the peach is on the Empire State Building, dripping juice on the citizens. As he is rescued by crane men, he discovers that his aunts found him and plan to take back James and the peach. James tells everyone his adventures and reveals Spiker and Sponge's abusive behavior towards him. They attempt to kill James with fire axes, while the policemen try to protect him. The bugs are able to fly back down to rescue James in time and tie up Spiker and Sponge, using Miss Spider's silk. The police have crane men to take them away, while James and his group are praised as heroes.
As thousands of children gobble up the fruit, the peach pit is made into a house in Central Park, a while later. James now has all the friends he wished for by telling them his courageous adventures, with the bugs becoming his legal guardians. It is then revealed that the narrator is the Confederate Soldier. While finishing the story, he grabs a "crocodile tongue" and winks at the audience.
- Paul Terry was bitten by the spider during the shooting of the spider scene (in which Miss Spider is portrayed by an actual spider). He briefly gave up acting before landing the role of Joe Parker in Microsoap.
- After his film debut, Terry appeared in the television series Microsoap and later performed as the bass player for indie band Glassapple before becoming a mathematics teacher.
- In the book, James didn't change into anything at all. Instead, he stays in his normal human form.