In olden times, England is in turmoil. With the death of the King, noone can decide who is the rightful heir to the throne. With war threatening to tear the country asunder, a stone and anvil appear from the heavens in London town, with a sword planted firmly in the anvil. On the hilt of the sword, read the words, "Whoso pulleth out this sword of this stone and anvil is rightwise king, born of England." Many try to pull the sword, but none can budge it. In time, the sword is forgotten, and the Dark Ages plunge the countryside into a dismal state.
Out in the woods one day, Sir Kaye is out hunting with his adopted brother Arthur, whom everyone names 'Wart.' After causing Kaye to miss shooting a deer, Arthur promises to retrieve the arrow. Arthur's journey leads him to a small hut, wherein resides a sorcerer named Merlin, and his pet owl, Archimedes, who can talk. Merlin explains to Arthur that he was expecting him to appear. After they have tea, Merlin decides to accompany Arthur back to his home, and after packing up everything in the hut into a small satchel, the two set off.
Arthur and Merlin arrive at the castle of Sir Ector, where Arthur is immediately put to work in the kitchen. Merlin introduces himself to Ector, and displays his powers to the doubting Knight. After some persuasion, Ector allows Merlin to stay, putting him up in the Northwest Tower, a crumbling edifice of the castle.
A few days later, Archimedes observes the arrival of Sir Pelinore, who has brought news from London of a jousting tournament to Ector and Kaye. According to the rules, the winner of the tournament will become the new King of England. Ector eagerly begins to have Kaye train, and in his excitement, promises Arthur that if he keeps working hard at his duties, he can become Kaye's squire.
Merlin hears of this news, and decides to push Arthur to see his true potential (as Merlin can move into the past and the future, he knows who Arthur will become). While walking outside along the castle's moat, Merlin explains that he can turn into a fish. This idea excites Arthur, and Merline turns them both into fish, to explore the moat. However, a much larger fish soon gives chase to young Arthur, until they both manage to escape.
Arthur's tardiness in helping Kaye practice results in him washing dishes. Merlin finds him, and after bewitching the dishes and washing utensils, leads Arthur into the forest, where they both are turned into squirrels by the sorcerer. As Arthur leaps among the trees, he comes across a girl squirrel, who is soon madly infatuated with him. Merlin finds the whole scenario cute, until he is soon found irresistible by another squirrel. Merlin then changes himself and Arthur back to normal. The girl squirrel who was infatuated with Arthur, skitters away, heartbroken.
Arthur and Merlin return to the castle, where Ector lectures Merlin for making Arthur shirk his duties. Arthur tries to defend Merlin, but his 'mouthing off' ends causes Ector to declare that Arthur will not become Kaye's squire, and that that honor will belong to another person of the castle, who is named Hobbes.
Arthur is dejected at what has happened, but Merlin tries to get him to persevere, and plans to educate Arthur. As he attempts to explain things, Archimedes interjects on Merlin's teaching methods, as Merlin is educating Arthur on things that will not be proven for hundreds of years, and could very well lead people to think of Arthur as a raving lunatic in their current Dark Ages.
Exasperated at this lecturing, Merlin turns teaching duties over to Archimedes, while he fiddles with a model plane. Archimedes scoffs at the toy plane, while Merlin attempts to prove that 'man will fly.' His efforts lead to the plane plummeting like a rock to the moat below. Even though the plane's flight was a failure, Arthur tells of how he's often dreamed of soaring like a bird. It is then that Merlin uses his magic to fulfill this wish. Archimedes then takes it upon himself to teach Arthur to fly, but is soon impressed by how quickly he has picked up the technique. Their lessons are then interrupted when a hawk appears, chasing Arthur into the nearby woods.
Arthur soon finds himself in the thatched hut of a witch named Madam Mim, who playfully shows Arthur her magic powers, which are moreso for evil purposes. As Arthur explains more about Merlin and his magic, Mim decides to 'destroy' the little bird. However, before she can do this, Merlin appears, and Mim proposes a Wizard's Duel.
Merlin accepts, and the two head off into the woods, where they then shapeshift into a number of creatures, all in an attempt to destroy the other. It appears that Mim has won, until Merlin turns himself into a germ, causing the witch to become gravely ill. With Mim now safely 'detained,' Merlin, Arthur and Archimedes head back to the castle.
Back at the castle a few days later, as Kaye and Ector prepare to head off to London for the tournament, they are informed that Kaye's squire, Hobbes, has come down with a terrible cold. Needing a replacement quickly, Ector recruits Arthur. Arthur then joyfully goes to tell Merlin the news. Archimedes commends the boy, but Merlin is incensed that after all he's done to try and teach Arthur, he has chosen such a demeaning thing as being a squire to Kaye. Arthur tries to reason with Merlin, but the sorcerer grows so upset, that he rockets out of the room, yelling 'Blow me to Bermuda!' Archimedes explains that he's gone to an undiscovered island somewhere, but doesn't know if the sorcerer will return.
In London, the tournament is under way, and Kaye is soon up for battle. However, Arthur realizes that he left Kaye's sword back at the inn they are staying at. Kaye furiously yells for Arthur to retrieve it immediately! When Arthur gets there, he is saddened to find the inn locked. As Archimedes looks around, he sees the sword in the stone. With little effort, Arthur draws the sword from it's resting place, and rushes back to the tournament.
Kaye is at first angered that the sword isn't his, until Sir Ector notices the inscription, and word spreads that someone has pulled the Sword from the Stone. When Ector asks Arthur how he got it, he refuses to believe the boy could have pulled the sword out himself.
Arthur, Ector, Kaye and a crowd return to the stone and anvil, where Ector re-inserts the sword, wanting Arthur to do it again. Kaye brushes the boy aside, feeling that since it's already been pulled, anyone can do it. However, the sword has again become immovable. This causes a stampede of others trying to pull it out, before several people demand that Arthur try again. The rabble dies down, and Arthur tries again...and succeeds where the others have failed.
As the legend decrees, Arthur is made King of England. However, he is unsure just what to do, and cries out for Merlin's help. Merlin then returns, back from Bermuda, and the 20th Century. When Arthur explains what happened, Merlin grows happy that it seems that Arthur has fulfilled his destiny, and now plans to help the 'once and future king.'