In a land where humans live in a town called Shining Time and animated, talking trains exist and operate on the Island of Sodor, one man, Mr. Conductor (ALEC BALDWIN), regularly travels between the two, using his magical, dust-powered "sparkle" as a means of doing so. The innocence and bliss of both lands becomes threatened, however, when Diesel 10 (voice of NEIL CRONE), a mean spirited diesel train engine, decides it's time to find a lost and magical steam engine named Lady and destroy her and a legendary magic railway once and for all.
This greatly upsets the other steam engines including Gordon (voice of NEIL CRONE)), James (voice of SUSAN ROMAN) and Thomas (voice of EDDIE GLEN), who all work for the monopolistic owner, Mr. Topham Hat (who's never seen but is occasionally heard grumbling on the phone). As Diesel 10 and his two engine cronies, Splatter (voice of NEIL CRONE) and Dodge (KEVIN FRANK), set out to find Lady, little do they know she's hidden away in Muffle Mountain, just outside Shining Time.
There, a lonely old grandpa, Burnett Stone (PETER FONDA), cares for her and not only laments that he didn't protect her from Diesel 10 in the past when he and his wife-to-be were kids, but also that he currently can't find any coal that will make Lady run once again. At the same time, Mr. Conductor begins to worry as he realizes that his supply of magic dust has run out and left him on Sodor with no way to return.
Thus, he call his slacker cousin, Junior (MICHAEL E. RODGERS), to bring him some. Junior, however, meets Stone's granddaughter, Lily (MARA WILSON), and uses up his last "sparkle" to transport the two of them to Sodor. With Diesel 10 continuing his quest to find and destroy Lady, it's up to Thomas, Lily and her new human friend, Patch (CODY McMAINS), along with Mr. Conductor and Junior, to thwart the diesel's efforts, find more magic dust, and restore peace and harmony to both worlds.