In both the play and the novel, Peter often visits the "real world" of London to listen in on bedtime stories told by Mary Darling to her children. One night, Peter is spotted and, while trying to escape, he loses his shadow. On returning to claim his shadow, Peter wakes Mary's daughter, Wendy Darling. When Wendy succeeds in re-attaching his shadow to him, Peter takes a fancy to her and invites her to Neverland to be a mother to his gang of Lost Boys, the children who are lost in Kensington Gardens. Wendy agrees, and her brothers John and Michael go along. The dangerous and magical flight to Neverland is followed by many adventures. The children are blown out of the air by a cannon and Wendy is nearly killed by the Lost Boy Tootles. Peter and the Lost Boys build a little house for Wendy to live in while she recuperates (a structure that, to this day, is called a Wendy House.) Soon John and Michael adopt the ways of the Lost Boys, while Wendy plays the role of mothering them, all the while invoking the jealousy of Tinker Bell, Tiger Lily, and the mermaids. Peter is often oblivious, concentrating on real and make-believe adventures and on taunting the pirate Captain Hook. Later follows adventures at Mermaids' Lagoon, the near deaths of Tinker Bell and Peter; a violent pirate/Indian massacre, and a climactic confrontation with Peter's nemesis, the pirate Captain Hook of the pirate ship the Jolly Roger. In the end, Wendy decides that her place is at home, much to the joy of her heartsick mother. Wendy then brings all the boys back to London. Peter remains in Neverland, and Wendy grows up.

In the novel, Barrie includes an additional scene which was not in the play, but which he created for the stage under the title An Afterthought. In this scene, Peter returns to Wendy's house, not realizing that more than twenty years have passed since he took Wendy, John and Michael to Neverland, and that Wendy is now a married woman with a daughter, Jane. Confronted with the news, he breaks down and cries. Wendy leaves the room to try to think, and Peter's sobs awaken Jane, who asks him to take her with him to Neverland and to let her be his new mother. Peter joyfully accepts, and the two fly off together with Wendy sorrowfully looking off after them. Peter will now come for Jane once a year so that she will help him with his spring cleaning.

The additional scene is almost never used in the play or film versions, but it made a poignant conclusion to the famous musical production starring Mary Martin.