Bastian Balthazar Bux is a shy and outcast bibliophile ten-year-old who lives in the fictional city of De Forest, Washington. He is raised by his widowed father and teased by bullies from school. On his way to school, he hides from the bullies in a bookstore, interrupting the grumpy bookseller, Carl Conrad Coreander. Bastian asks about one of the books he sees, called “The Neverending Story”, but Mr. Coreander advises against reading it. With his curiosity piqued, Bastian seizes the book, leaving a note promising to return it, and hides in the school’s attic to read. The book describes the fantasy world of Fantasia slowly being devoured by a malevolent force called “The Nothing”. Fantasia’s ruler, the Childlike Empress, has fallen ill, and the young warrior Atreyu is tasked to discover the cure, believing that once the Empress is well, the Nothing will no longer be a threat. Atreyu is given a medallion named the Auryn that can guide and protect him in the quest. As Atreyu sets out, the Nothing summons Gmork, a vicious and highly intelligent wolf-like creature, to kill Atreyu.
Atreyu’s quest directs him to the turtle-like adviser Morla the Ancient One in the Swamps of Sadness. Though the Auryn protects Atreyu, his beloved horse Artax is lost to the swamp, and he continues alone. Morla does not have the answers Atreyu seeks, but directs him to the Southern Oracle, ten thousand miles distant. Atreyu succumbs to exhaustion trying to escape the Swamps but is saved by the luckdragon Falkor. Falkor takes him to the home of two gnomes that live near the entrance to the Southern Oracle. The gnomes explain that Atreyu will face two gates before reaching the Oracle. Atreyu gets past the first gate, The Sphinx Gate, but is perplexed when the second gate, The Magic Mirror Gate, a mirror that shows the viewer’s true self, reveals a boy which Bastian recognizes as himself. Atreyu eventually meets the Southern Oracle who tells him the only way to save the Empress is to find a human child to give her a new name, beyond the boundaries of Fantasia. Atreyu and Falkor flee before the Nothing consumes the Southern Oracle. In flight, Atreyu is knocked from Falkor’s back into the Sea of Possibilities, losing the Auryn in the process. He wakes on the shore of the abandoned ruins, where Gmork reveals himself, having been lying in wait. Gmork explains that Fantasia represents humanity’s imagination and is thus without boundaries, while the Nothing is a manifestation of the loss of hopes and dreams. Atreyu fends off and kills Gmork as the Nothing begins to consume the ruins.
Falkor, who had managed to locate the Auryn, rescues Atreyu in time. The two find themselves in a void with only small fragments of Fantasia remaining, and fear they have failed when they spot the Empress’ Ivory Tower among the fragments. Inside, Atreyu apologizes for failing the Empress, but she assures him he has succeeded in bringing to her a human child who has been following his quest: Bastian. She further explains that, just as Bastian is following Atreyu’s story, “others” are following Bastian’s, making this part of the neverending story. As the Nothing begins to consume the Tower, the Empress pleads directly to Bastian to call out her new name, but in amazement that he himself has been incorporated into the story as the child they were looking for, he denies the events as just being a story. Atreyu’s death spurs Bastian to pronounce the name he has chosen before losing consciousness: “Moon Child”. Bastian awakes with the Empress, who presents him with a grain of sand, the sole remnant of Fantasia. The Empress tells Bastian that he has the power to bring Fantasia back with his imagination. Bastian re-creates Fantasia, and as he flies on Falkor’s back, he sees the land and its inhabitants restored, and that Atreyu has been reunited with Artax. When Falkor asks what his next wish will be, Bastian then brings Falkor back to the real world to chase down the bullies from before. The film ends with the narration that Bastian had many more wishes and adventures, and adds: “but that’s another story”.