Summary: A very good 1980's Dark Fantasy with some very powerful scenes. It may the the best movie of its genre.
The Nothing is devastating the land of Fantasia. It is spreading, destroying everything in its path. It has left the Empress ill, so even she is unable to save Fantasia. But there is hope in Atreyu, a young warrior of the purple buffalo hunting Plains People, who just might be able to stop it. He is, seemingly, their only hope.
This is the inner plot of Neverending Story. A simple plot to rest a movie on - on its own it isn't very special. That said, Atreyu's quest is somewhat unusual in its vagueness - usually a story like this would employ a straightforward MacGuffin for the hero to find, or have to deliver to someone, or have to destroy, that would stop the threat. Atreyu is given a magical artifact - the AURYN - but it doesn't serve as a MacGuffin. It mainly serves to mark Atreyu's importance and as potential phlebotinum.
In fact, the exact purpose of Atreyu's quest isn't revealed until later in the movie, tying the inner plot about Fantasia and the Nothing, to the outer plot about Bastian, who is reading the story we're watching.
Bastian is a boy with a healthy imagination - though it's distracting him from his responsibilities. He shares a house with his pragmatic father, who only has time for a breakfast made in a blender and includes raw eggs, and who reprimands Bastian for spending too much time in his own imagination. On his way to school he's intercepted by some extremely sadistic bullies, the sort that frequents 80's movies, being forced to hide in a strange bookstore managed by a curmudgeon who lambasts Bastian and his generation for not having enough imagination. After learning that Bastian is a fan of classic fantasy novels, the old man baits him into stealing a copy of the Neverending Story. It's through Bastian's reading of Neverending Story that we discover the land of Fantasia and the Nothing which consumes it.
Somehow the overall tone of Atreyu's quest remains surprisingly light in spite of some very dark, powerful scenes. Early in the story, he and his horse, Artex, find themselves in a swamp that consumes any creature overcome by hopelessness. For some reason Artex is very hopeless indeed, and begins slowly sinking into the swamp as Atreyu, who is incapable of stopping it, has no choice but to watch his companion slowly die. It may be the best scene in the movie. Later, he meets a wise old hermit turtle, Morla, who is so gripped by madness from eons of isolation and boredom that she wants to see Fastasia destroyed by the Nothing just for something to happen at all. Another great, sad, scene is of the Rock Biter, who we first meet in the beginning of the film, who couldn't hold on to his friends as they slipped out of his hands and were taken by the Nothing. "They look like big, good, strong hands. Don't they?" he says, before resigning to being taken by the Nothing himself.
Fantasia itself is populated by strange looking, grotesque creatures that look amazing. Everything has substance. The style is ugly, and a little gross (as is typical in the Dark Fantasy movies of the 1980s) Creatures we like are certainly no exception: the Rock Biter, the Snail, the Bat, the Gnomes are all ugly. Even friendly and warm Falcor the luck dragon is ugly. The collection of creatures, the good citizens of Fantasia, waiting for the Empress at the Ivory Tower to save them, are the stuff of nightmares, with bizzare faces and shapes. Mos Eisley is tame by comparison. Fantasia is an amazing, wonderful, creepy place.
Near the end, Fantasia is destroyed by the Nothing. The Nothing, as turns out, is really the lack of imagination, hope, and dreams of a modern humanity that no longer has a place for Fantasia. But though only small fragments of his world remain, Atreyu did not fail in his quest. Ultimately, his purpose was to get the attention of Bastian, the boy reading the story (and by proxy all of us watching the movie). To save Fantasia, Bastian just needs to give the Empress a new name, which takes a certain amount of belief in the realness of the fantasy world he is reading. Reluctant at first, Bastian gives her a new name (Moon Child?? No one watching the movie could have understood what Bastian said), and saves Fantasia, restoring it to its former glory. Atreyu even gets his horse back.
While Bastian's arc lends the movie a cool postmodern twist, as a story it is much weaker than Atreyu's, and as a moral for Bastian it isn't very interesting. Bastian was never one who had to be reminded of the wonders of an imagination, and he never took his father's advice about being more grounded in reality. He changed in no meaningful way - he started as a boy eager to read about fantastic adventures and ended as one. (Or are we to take Falcor flying through a city street more literally, and say Bastian started as a boy eager to read about fantastic adventures and ended as a boy who lives in one? But what kind of moral would that be, that we should literally believe in the existence of the stories we read?) Clearly, the moral is as much for the audience as it is for Bastian, but we're an audience watching a fantasy story, so we probably don't need this lesson either. Maybe the moral is for all the parents whose children dragged them into the movie. It is interesting to note how the moral here is so different than another classic 1980's dark fantasty, Labyrinth, in which Sarah learns to grow up and accept reality as it is.
The story ends. So why is it the Neverending Story exactly? Is it that anyone who picks up the book reads the same story, and becomes intwined in its plot just as Bastian has? Or is it that, while The Neverending Story is read by Bastian, Bastian is in turn being watched by us, and - if we're willing to believe it - our story may be read and watched by someone else? Or is it, as Lionel Hutz says, just a big case of false advertising?