In London, England, circa 1900, George and Mary Darling’s preparations to attend a party are disrupted by the antics of their boys, John and Michael, acting out a story about Peter Pan and the pirates that was told to them by their older sister, Wendy. George, who is fed up with the stories, declares that Wendy has gotten too old to continue staying in the nursery with the boys. That night, Wendy and the boys are visited in the nursery by Peter Pan himself, who teaches them to fly with the help of his pixie friend, Tinker Bell, and takes them with him to the island of Never Land.
A ship of pirates is anchored off Never Land, captained by Captain Hook with his first mate, Mr. Smee. Hook plots to take revenge upon Peter Pan for cutting off his hand, and fears the crocodile who had consumed the hand and is eager to eat the rest of him. The crew’s restlessness is interrupted by the arrival of Peter and the Darlings. Tinker Bell, who is very jealous of Pan’s attention to Wendy, persuades the Lost Boys that Pan has ordered them to shoot down Wendy. Tinker Bell’s treachery is soon found out, and Peter banishes her. John and Michael set off with the Lost Boys to find the island’s Indians, who instead capture them, believing they to be those responsible for taking the chief’s daughter, Tiger Lily.
Meanwhile, Peter takes Wendy to see the mermaids, who flee in terror at the sight of Hook. Peter and Wendy see that Hook and Smee have captured Tiger Lily so that they might persuade her to disclose Peter’s hideout. Peter and Wendy free her and return her to the Chief, and Peter is honored by the tribe. Hook then plots to take advantage of Tinker Bell’s jealousy of Wendy, tricking her into revealing the location of Peter’s lair. Wendy and her brothers eventually grow homesick and plan to return home. They invite Peter and the Lost Boys to return to London and be adopted by the Darling parents. The Lost Boys agree, but Peter doesn’t want to grow up and refuses. The pirates lie in wait and capture the Lost Boys and the Darlings as they exit the lair, leaving behind a time bomb to kill Peter. Tinker Bell learns of the plot just in time to snatch the bomb from Peter as it explodes.
Peter rescues Tinker Bell from the rubble and together they confront the pirates, releasing the children before they can walk the plank. Peter engages Hook in combat as the children fight off the crew. Hook and his crew flee. Peter commandeers the deserted ship and, assisted by Tinker Bell’s pixie dust, flies it to London with the children aboard. However, the Lost Boys decide to return to Never Land with Peter rather than be adopted in London. George and Mary Darling return home from the party to find Wendy sleeping at the open window of the nursery. Wendy awakens and excitedly tells about their adventures. The parents look out the window and see what appears to be a pirate ship in the clouds. George, who has softened his position about Wendy staying in the nursery, recognizes the ship from his own childhood.