Young Bastian Balthazar Bux (Barret Oliver
) prepares for another day of school one morning. He shares a tense conversation with his father (Gerald McRaney
) about how he dreamed of his mother (assumed to have passed away due to illness). Bastian's father, who has not gotten over the tragedy himself, merely notes that it seems Bastian has allowed his mind to stray and brings up the fact that he received a letter from Bastian's teacher about how he was drawing horses in his math book. "Unicorns," corrects Bastian under his breath, but his father continues, noting that Bastian did not try out for the swim team. Bastian tries to explain that he wanted horseback riding lessons instead but his father retorts that Bastian is too afraid to even get on one, much less ride it. His father then leaves for work, telling his son that he needs to 'keep his feet on the ground' and pay attention at school more.
On the way to school, Bastian comes across some bullies from school (Chris Eastman
, Darryl Cooksey
, and Nicholas Gilbert
) who demand that he hand over his money. When Bastian produces none, they throw him into a garbage dumpster. Bastian eventually gets out but doesn't make it very far until he encounters them again. This time, they give chase but Bastian loses them by ducking into an old bookstore. The owner, Mr. Carl Conrad Coreander (Thomas Hill
) scoffs at Bastian, thinking him to be another child interested only in arcade games and comic books but Bastian names all the real books he has read, including Treasure Island and The Lord of the Rings. His interest roused, Coleander strikes up a conversation and finds out that Bastian is hiding from some bullies. When asked why he doesn't stand up for himself, Bastian only shrugs. Bastian then notices the book Coleander is reading. The man explains that it is a special book, and quite dangerous, apart from the 'safe' books that Bastian is used to reading. He alludes to the fact that, while reading, a person may become immersed in the story to the point where he or she feels like they're living the tale, but there is always the guarantee that they can put the book down and return to reality. He informs Bastian that the book is not for him and sets it down before returning to his duties. Curious, Bastian takes the book, titled 'The Neverending Story', and leaves a note for Coreander, explaining that he will return the book later.
Bastian arrives to school late and, when he sees that his class is busy taking a test, he goes up to the school's attic and finds quiet refuge. He settles in and begins to read:
In a dark wooded area, two creatures known as Night Hob (Tilo Prückner
) and Teeny Weeny (Deep Roy
) have stopped to rest during an apparent journey. Suddenly, the sound of loud crashing is heard and a giant Rock Biter (Alan Oppenheimer
) arrives on a rock-cycle. He tells the others about something indescribable that is destroying the realm where he comes from in the North. Night Hob and Teeny Weeny explain that they have both seen the effects of this strange 'Nothing' in their parts of Fantasia. The conversation then turns to how each of them has been sent by their people to seek help from the Childlike Empress. All three continue their journey together to the Ivory Tower, home of the Empress of Fantasia. Night Hob makes his way to the main floor of the structure where a man named Cairon (Moses Gunn
) addresses the crowd who have come for answers as well. Cairon explains that the Empress is ill and that the Nothing, the force behind all the disturbances, may be responsible. However, a great warrior of the Plains People, named Atreyu, has been summoned, believed to hold the key to saving their world.
Atreyu (Noah Hathaway
) then steps forward and, to the surprise of Cairon and the assembly, is revealed to be a young boy. Cairon is unconvinced and claims that they summoned for 'Atreyu the Warrior', not 'Atreyu the Child'. Atreyu boldly answers that he is the only one known by this name and bravely accepts what quest the Empress has set for him. Cairon explains the Empress' request: Atreyu must find a cure for her and save their world from the Nothing. He is given the AURYN, a medallion comprised of two intertwining snakes, that will guide and protect him on his journey.
Atreyu sets out across Fantasia on the back of his horse Artax. Unknown to him, a wolf-like creature emerges from its cave in another realm of the kingdom, and sets out after their trail. Atreyu and Artax search through a number of places but find no cure for the Empress. Eventually, they decide to go to the Swamps of Sadness to seek the advice of Morla, the ancient one. As they cross through the swamps, the sadness that lingers in this region takes hold of Artax who stops in his tracks and begins to sink into the bog. Though Atreyu tries to bring his horse back from sadness, Artax is consumed by the swamp, much to the heartbreak of both Atreyu and Bastian. Atreyu continues alone and soon finds a giant mound. As he approaches, the mound suddenly rises up and is revealed to be an enormous turtle, none other than Morla. The description as he reads it causes Bastian to cry out in shock and his shout is heard somehow by both Atreyu and Morla. Having spent so much time alone, Morla has taken to talking to himself and now refers to himself as 'we' instead of 'I'. Morla explains to Atreyu that he does not know how to save the Empress but tells him to seek the Southern Oracle. Atreyu's heart sinks when he hears the Oracle resides 10,000 miles away.
As he trudges through the swamps, the sadness creeps up on Atreyu and he slowly begins to sink as the wolf-creature closes in on him. Then, a cloud-burst appears in the sky and a slim figure flies down and plucks Atreyu from the swamps just as he wolf-creature lunges forward. Atreyu later wakens to find himself cleansed and in the company of a white luck-dragon named Falkor (Alan Oppenheimer
). Falkor explains that Atreyu spoke in his sleep, eventually revealing his name and his quest. Falkor has brought him 9,891 miles along his 10,000 mile journey to the Southern Oracle. Not far away is a small hovel where Atreyu is introduced to Engywook (Sydney Bromley
) and Urgl (Patricia Hayes
). Engywook has been studying the Southern Oracle for some time through a telescope and shows Atreyu the path through two gateways which will lead him there. The first gate is comprised of two giant sphinx statues. Atreyu learns that any man who feels his worth is permitted passage, but the sphinxes judge whomever comes before them and destroy any who feels a tinge of doubt. Atreyu watches as a mounted rider attempts to pass, but he is shot down by beams of fire shot from the sphinx's eyes. Atreyu goes forth to test his merit but becomes fearful when he sees the body of the rider. As the sphinx's eyes begin to open, Atreyu dodges forward, just missing the beams. Engywook is ecstatic that Atreyu has made it through but tells the others with warning that he must now pass through the Magic Mirrorgate, a large reflective gateway that shows a person what they truly are inside. Men have fled screaming from the sight of their inner selves.
As he journeys from he first gate towards the second, Atreyu passes through a snowy landscape until he finds himself at the Mirrorgate. Looking into it, he is shocked to see a little boy sitting in a room reading a book. As Bastian reads this, he freaks out and throws the book away. After a moment of contemplation, he returns to continue reading.
Atreyu is able to pass through the Mirrorgate and finally comes across the Southern Oracle (Tami Stronach
), an object resembling the sphinxes with wings. A voice echoes from it and reveals what can be done to save the Childlike Empress; she must be given a new name. Atreyu is certain that he can do this but the Oracle informs him that it must be done by a human child and that they can only be found beyond the boundaries of Fantasia. The voice encourages Atreyu to hurry as its facade begins to crumble. Atreyu returns to Falkor and they go off in search of Fantasia's borders. However, they soon encounter the Nothing and Atreyu is knocked off Falkor's back. He awakens on an unknown shoreline and finds that he's lost the AURYN from around his neck. Desolate, he wanders the landscape until he encounters the Rock Biter who laments that his friends (Night Hob and Teeny Weeny) were taken from him by the Nothing. He mourns the fact that he was unable to protect them and now awaits the same fate.
Atreyu then wanders into a cavern where he is surprised to see cave paintings that appear to have chronicled his journey so far. As he reaches near the end, he sees an image of a creature with green eyes and sharp fangs. Something stirs nearby and Atreyu leaves the cavern and comes face to face with the wolf-like creature, partially hidden in shadows. It greets Atreyu with hostility and claims that its name is Gmork (Alan Oppenheimer
) before promising to make Atreyu its last victim. Atreyu promises not to be defeated as he is a warrior but Gmork scoffs when Atreyu admits he's not able to fight the Nothing since he can't find Fantasia's boundaries. Gmork reveals that Fantasia has no boundaries since its existence is shaped by the imagination of humans. Since humans have slowly given up on their imaginations and dreams, the Nothing has been consuming Fantasia. It admits that it is a servant of the Nothing, bent on gaining power and control, and was sent to kill the only person capable of stopping it; Atreyu. Angry, Atreyu reaches for a wooden shank and shouts that if he is to die, he will do so fighting. He then tempts Gmork to fight him, since *he* is Atreyu and the target of its search. Gmork lunges at him but Atreyu manages to kill it, stabbing it with the wooden shank.
After he has done so, the force of 'The Nothing' finally begins to tear the land Atreyu is on apart. Atreyu clings to a tree, crying out for Falkor. Falkor has finally found Atreyu, as well as the AURYN, and saves him.
The storm that Atreyu was caught in was the end of Fantasia, with nothing remaining of the land but small fragments floating in a black space. Atreyu sadly admits that he has failed, but wonders if the Ivory Tower might still exist. Using the AURYN, he requests that it lead the two of them to the Ivory Tower if it still stands. The AURYN does so, and the tower can be seen still in one piece, floating on a piece of land in the void.
Atreyu ascends to meet the Childlike Empress, who asks why Atreyu is so sad. Atreyu claims he failed, but the empress says that he has brought the human child with him. The empress claims that Atreyu's journey was necessary for the human child to follow along with their adventures.
Bastian cannot believe that they are talking about him, but the empress soon reveals revelations regarding the bullies that chased him, as well as the bookstore. Eventually, a large tremor shakes the tower, and Atreyu is injured. The empress pleads to Bastian through the book to say her name, as this will save her and their world.
Bastian is torn, as he seems to be giving into a flight of fancy, rather than keeping his feet on the ground as he said he would do for his father. Finally, Bastian calls out the name for the empress, and the attic of the school goes black.
Suddenly, the empress' voice rings in his ears, and Bastian finds himself face to face with her. In her outstretched hand, she holds a 'grain of sand,' the last remains of Fantasia. She entrusts this to Bastian, and says that through his imagination, Fantasia will live again, as long as he keeps wishing.
Bastian then begins to wish, and finds himself on Falkor's back, flying through the landscape of Fantasia, seeing it returned to normal. Falkor then asks Bastian what his next wish is. Bastian thinks, and the whispers into the giant dragon's ears, causing the creature to chuckle loudly.
Back in the ordinary world, the bullies are shocked when Falkor and Bastian come flying down from the sky, chasing them down an alley. One of the bullies falls into a clump of garbage, while the others jump into the same dumpster that they had put Bastian in. Falkor swoops upwards, laughing victoriously.
A closing narration explains that Bastian made many more wishes and had many more exciting adventures before finally returning to the ordinary world...but that's another story.