the perpetually young Peter Pan from time to time visits his birthplace of London in 1904, where he becomes enthralled by the stories he hears being told by Wendy Darling to her brothers. Wendy asks to visit Never Land and Peter invites her to be the "mother" to his gang of Lost Boys. Before leaving, she asks to bring her brothers John and Michael, and Peter teaches them all to fly with him.
Out of jealousy, Tinker Bell tricks the Lost Boys into shooting Wendy as she approaches the island, but Wendy survives and the boys ask her to be their mother and tell them stories. Meanwhile Captain Hook captures John and Michael and holds them as bait for Peter. Wendy and Peter free them, with help from the Amerindian princess Tiger Lily and the timely arrival of the crocodile that ate Hook's hand.
That night, Peter and Wendy share a romantic "fairy dance", while Hook spies on them, distressed that Peter has "found himself a Wendy". Peter reminds Wendy that "they" are make believe, and Wendy confronts Peter about his feelings about love. Peter becomes upset with her, and tells her to go home if she's not happy. Wendy, in tears, escapes to her little house. Peter returns to the Darling house, and seeing that Wendy's mother is still waiting for the children to come home, he attempts to shut the window (to make Wendy's parents forget about them). But, after a struggle, Wendy's parents manage to reopen the window, refusing to let it be closed.
Hook later finds Wendy and has her carried to his ship, the Jolly Roger. There, he entices her with a job telling stories to the crew, then sends a spy to follow her to the Lost Boys' underground lair. The next day, after Peter hears of a new pirate, Wendy admits she was asked to serve as a crewman. Later, the pirates kidnap her and the boys by tying every one of them up and gagging them and carrying them over their shoulders to Hook's ship, but since Hook is unable to reach Peter, he leaves poison for Peter to drink when he wakes up. Tink stops him, poisoning herself in the process; Peter reaches out to the other children sleeping around the world, the Darlings, and even the pirates to sustain her with their belief in fairies.
Peter and Tink save the children from walking the plank, and they all fight against the pirates. Hook gets sprinkled with Tink's fairy dust, and duels Peter in the air, weakening him with taunts about Wendy abandoning him and growing up. Peter finally falls, unable to fight anymore and gives in to inevitable death. But with a "thimble"(kiss) from Wendy, Peter recovers and sends Hook above the crocodile. The crocodile takes a jump out of the water and snaps his jaws around Hook. Hook begins to think unhappy thoughts, which drag him down and allow the crocodile to swallow him alive. Wendy decides that she belongs back home, and returns to London with her brothers and the Lost Boys. Peter chooses not to grow up.
In an alternate ending based on Barrie's epilogue, included on the DVD release with unfinished special effects, Peter returns to the London house 20 years later, finding Wendy as a grown mother. He is deeply hurt when she tells him she has grown up, and walks over to Wendy's daughter who is asleep in bed. His sobbing awakes the little girl, and she introduces herself as Jane. Peter grins excitedly at Wendy, and with her mother's permission, Jane flies away with Peter to Neverland.