The story begins in the orderly London nursery of the Darling family, where Wendy, John, and Michael are raised by their anxious father, their loving mother, and a Newfoundland dog named Nana who serves as nurse. Into this world slips Peter Pan, a boy who has run away so as never to become a man, in search of the shadow he lost on an earlier visit. When Wendy sews his shadow back on, he offers to teach the children to fly and take them away to the Neverland, where he is captain of the lost boys.
Sprinkled with fairy dust and led by the jealous fairy Tinker Bell, the children fly off toward the island, reached, Peter says, by heading second to the right and straight on till morning. The flight is long, careless, and dangerous, for Peter saves the sleepy children only at the last moment and treats their near-falls as sport. The episode sets his pattern: dazzling, brave, and wholly without the steady care that the children, especially Wendy, quietly need.
On Neverland the new arrivals meet the lost boys, the redskins, the mermaids, and the pirates led by Captain Hook, a villain obsessed with good form and pursued everywhere by a crocodile that swallowed a ticking clock and now hungers for the rest of him after tasting his arm. The lost boys at once beg Wendy to be their mother, and a make-believe family forms in the home under the ground, with Wendy mending and storytelling while Peter plays at being a father he is careful to insist he only pretends to be.
The play turns deadly as Hook captures the children and carries them to his ship. When Tinker Bell drinks poison meant for Peter, he saves her by calling on every child who might be dreaming to clap if they believe in fairies. He then boards the pirate ship, frees the boys, and kills Hook in a duel, sending the captain at last into the jaws of the waiting crocodile. The children sail the ship home, and most of them, with the lost boys, are taken in and adopted by Mrs. Darling.
Peter alone will not stay. He returns each spring to fetch Wendy for cleaning, then forgets for years at a time, and one day finds that Wendy has grown up, married, and had a daughter, Jane. He cannot bear it, weeps on the nursery floor as he did at the start, and then flies off with Jane instead. The book closes on this cycle repeating down the generations, going on, it says, so long as children are gay and innocent and heartless.