Not wanting to hurt Peter's feelings, Wendy hands him a thimble and presents it as "a kiss." In return, he gives her an acorn button, and she tells him that she will wear it on a chain around her neck. Peter tells her he does not know how old he is, but that he ran away the day he was born, "because I heard father and mother talking of what I was to be when I became a man. I want always to be a little boy and to have fun; so I ran away to Kensington Gardens and lived a long time among the fairies."
Peter tells Wendy more about the world of fairies, saying, "You see, Wendy, when the first baby laughed for the first time, the laugh broke into a thousand pieces and they all went skipping about, and that was the beginning of fairies. And now when every new baby is born its first laugh becomes a fairy."
Peter bemoans the fact that many children know too much these days, and that every time a child says they don't believe in fairies, a fairy dies. Suddenly, Peter realizes that Tinker Bell is gone, but they both hear a faint tinkle of bells—the fairy language. He realizes that he shut her in the drawer and releases her. As the fairy goes darting around the room, Wendy tries to catch a glimpse.
Tinker Bell is upset about having been put in the drawer, calling Wendy "a great ugly girl" and Peter "a silly ass." Peter tries to tell Tink that she cannot be his fairy, since she is a lady and he is a gentleman. Peter tells Wendy he lives with the lost boys—"the children who fall out of their prams when the nurse is looking the other way"—in Never Land, and that he is the captain.
Peter tells Wendy that it is lonely in Never Land because there are no girls around. She offers him a kiss, but when he gives her the thimble, she tells him that she actually wants a "thimble"—what we would call a kiss. As they go to kiss, "something prevents the meeting of their faces." Suddenly, Wendy realizes that Tinker Bell is pulling her hair, trying to prevent any potential kiss between Wendy and Peter.
When Wendy asks Peter why he came to their window, he tells her he came to hear stories and that none of the lost boys know any stories. He recalls that the other night Mrs. Darling was telling the children the story of Cinderella, and Wendy asks to come along with Peter to Never Land. He offers to teach her to fly, and Wendy asks if he will teach Michael and John to fly also.
Wendy wakes up her brothers and tells them that Peter is going to teach them to fly, when Nana begins barking. The children turn out the lights and dart into bed, as Liza and Nana enter the room. Liza sees that no one is there and scolds Nana for causing a fuss, but Nana can still sense that something is wrong. As Liza leads Nana away, the children come out from their hiding places. The stage direction reads, "In their brief absence from the scene strange things have been done to them; but it is not for us to reveal a mysterious secret of the stage. They look just the same."
Peter begins to fly, and tells them to think "wonderful thoughts that will lift them into the air." They begin to fly, gleeful, and Peter invites them to go out the window with him. He warns them that there are pirates in Never Land, but this does not deter the Darling children, who follow Peter excitedly. As they fly away, the Darling parents arrive home, "broken-hearted."
Act 2. The Never Land. The stage direction reads, "Then Peter's star wakes up, and in the blink of it, which is much stronger than in our stars, you can make out masses of trees, and you think you see wild beasts stealing past to drink, though what you see is not the beasts themselves but only the shadows of them. They are really out pictorially to greet Peter in the way they think he would like them to greet him; and for the same reason the mermaids basking in the lagoon beyond the trees are carefully combing their hair; and for the same reason the pirates are landing invisibly from the longboat, invisibly to you but not to the redskins, whom none can see or hear because they are on the war-path. The whole island, in short, which has been having a slack time in Peter's absence, is now in a ferment because the tidings has leaked out that he is on his way back; and everybody and everything know that they will catch it from him if they don't give satisfaction."
Never Land is an open landscape with a lagoon and a forest. There is a tree with doors in it, which is how Peter and the Lost Boys get into their home. A boy named Slightly emerges from the tree, holding a whistle, and an ostrich comes into the clearing. Then, Tootles comes out, "the humblest of the band." Then Nibs, Curly, and two twins arrive. The boys discuss the fact that they want Peter to come back, so that they can hear the end of Cinderella. Suddenly, they hear a pirate song, and the pirates enter, led by Captain Hook, a man with a hook for a hand, who is described thusly: "He is never more sinister than when he is most polite, and the elegance of his diction, the distinction of his demeanour, show him one of a different class from his crew, a solitary among uncultured companions."
Hook tells his pirates to look for the boys, suggesting that he wants to capture Peter Pan most of all, because Peter was the one who cut off his hand, and threw it to a crocodile. Now, the crocodile follows him everywhere, trying to eat the rest of him. "In a way it is a sort of compliment," says Smee, Hook's dim-witted sidekick. Hook tells Smee that the crocodile swallowed a clock and that one time he heard the clock strike six within the crocodile's belly.
Hook sits on a mushroom, finding it hot. When he takes off the top of it, he finds the mushroom is a chimney, for the lost boys' underground lair. Suddenly, the crocodile enters, and Hook runs in fear.
When the stage is empty, Tiger Lily, "the belle of the Piccaninny tribe," enters, listening to the ground, and beckoning her fellow Indians onto the stage. The Indians smoke a peace pipe and exit the stage.
When the Lost Boys come back onstage, Nibs tells the boys he saw a great white bird flying through the air, murmuring, "Poor Wendy." Tinker Bell flies onto the stage and tells the boys that Peter wants them to shoot "the Wendy," which they agree to do. When they shoot, Wendy falls to the ground, and the boys bemoan the fact that Tootles killed a lady. Peter arrives, and asks where Wendy went, identifying her as their new mother.
Peter Pan lives in a purely fantastical world, in which shadows can come detached, flying is possible, and fairies are beloved companions. While it is a whimsical world that Peter inhabits, this does not mean it is without its own rules and logics. For instance, Peter tells Wendy about the origin of fairies, telling her that the laugh of a newborn baby breaks apart and becomes a fairy, but that when a child does not believe in fairies, a fairy dies.
Thus we see that the fantastical world that Peter inhabits is one that is constituted by belief and imagination. Children's belief in fairies, their confidence that fairies exist, is literally what keeps fairies alive in the world of Peter Pan. In this fantasy world, belief not only constitutes reality theoretically, but literally. Fairies' literal survival depends on the actions of children.
The power of belief as a constitutive act extends to everything Peter does. His magical ability to turn that which seems impossible into a lived reality is part of what makes him such a special young boy. He can teach the Darling children to fly and bring them to a magical land in just a few moments, and he is a confident leader when it comes to navigating the world of magic and whimsy.
As confident as Peter Pan is, however, he is also haunted by a deep loneliness. As he tells Wendy, the reason he is orphaned is because he fell out of his pram as a child, and while Never Land sounds like a special, magical place, it is made all the lonelier by the absence of girls, who "are too clever to fall out of their prams." Peter is an excitable and brave young hero in many ways, but he is also a vulnerable and isolated little boy, searching desperately for a mother.
In this section, we are introduced to the fantastical Never Land, the home of Peter Pan and his many whimsical companions. Peopling the strange land, which seems like a complete figment of a child's imagination, are mermaids, Indians, pirates, and strange animals. They all coexist on the island in various antagonisms. Captain Hook, the evil and fey pirate, resents Peter Pan and the Lost Boys, but fears a crocodile that is trying to eat him. Meanwhile, Tiger Lily is a friend to the Lost Boys, but maintains her independence as a warrior woman. From the whimsy of the Darling residence, we are transported to an even more fantastical place, an island out of a small child's fantasy.