Bastian Bux is having troubles at home: his father Barney's busy workload is keeping him from consoling Bastian's fear of heights. As such, he then heads to an old bookstore where he again meets Mr. Koreander, who proceeds to help find a book on courage. While waiting, Bastian rediscovers the Neverending Story's book, and is shocked to see its words disappear off its pages. Deciding to take the book instead, Bastian returns home and finds himself able to claim AURYN right off the book's front cover while hearing the Childlike Empress summon him to Fantasia.
Aware of Bastian's arrival and purpose, an evil sorceress named Xayide orders a creation from one of her servants to stop him. The servant creates a memory machine that will strip Bastian of a memory each time he uses AURYN until he is unable to remember where he came from, or why he is in Fantasia. Xayide then sends a bird-like creature named Nimbly to persuade Bastian into making him wish. As the two arrive in a populated area of Fantasia called Silver City, the sorceress sends large monsters referred to as giants to attack. Despite Nimbly's attempts to make him wish them away, Bastian is able to escape from them without doing so. After falling into a secret passage, Bastian is contacted by the Childlike Empress, who tells him of a new threatening force to Fantasia, which is keeping her prisoner in her own castle as well as causing the stories of the ordinary world to disappear, and that he must identify and defeat it.
While trying to gather Silver City's inhabitants to help him out, Bastian is reunited with Atreyu, who has heard about what has happened. As the two try to figure out how to get there, Nimbly manages to persuade Bastian into making a wish, which he uses to create a vicious, fire breathing dragon. However, it goes out of control and flies off with Atreyu trying to pursue it with his horse, Artax. With help from Falkor, Bastian is able to chase the dragon to Xayide's castle, where it is destroyed by its defenses. After a brief reunion with Rock Biter, Bastian and Atreyu, who has caught up, make their way into the castle's entrance with the latter's "army": several wind up toys. Although Bastian gets through, Atreyu is captured. Once getting further into the castle by wishing for climbing steps, Bastian manages to free Atreyu from a giant and the two battle it with the use of a spray can, an item the former had wished for. After the giant falls over and cracks into pieces revealing a hollow shell, Bastian identifies the threat as "The Emptiness", the form of humanity's dying imagination. The two make their way to Xayide in her throne room who admits defeat, stating she had wanted to bring order to dreams and stories, which she consider as forms of chaos. The sorceress is then forced to bring them to the Childlike Empress' castle to free her after Atreyu subtly threatens to kill her.
Having noticed his son's disappearance and the Neverending Story's book, Barney takes the latter to Mr. Koreander's bookstore to ask him of Bastian's whereabouts. The owner simply tells him that he'll find the answers inside the book, much to Barney's confusion. Returning later with a police officer, he is shocked to see the bookstore abandoned as a result of the Emptiness. Looking inside the book, Barney is surprised to see his son's exploits in Fantasia being written by the book itself and that he is mentioned within.
During the travel to the Childlike Empress' castle, Xayide tries to trick Bastian into believing that his friends will turn against him and manages to get him to wish for a series of ridiculous wishes. It also becomes obvious to Atreyu that they are being led aimlessly. Becoming worried, Atreyu and Falkor believe that the only way help Bastian is to remove AURYN from him as they have learned of the memory machine and its effects on him. Bastian overhears them, and through a confrontation with Atreyu believes that he has turned against him. The two then fight, with Atreyu being knocked over a cliff and falling to his death. Returning to Xayide, Bastian discovers the memory machine for himself and learns that he only has two memories - consisting of his mother and father - left. In an attempt to use Artax to follow Falkor, who has taken the fallen Atreyu away, he is nearly killed by an attack from Xayide. Now on foot, Bastian is encountered by Nimbly once more, who has had a change of heart after seeing one of his memories, and guides him to his friends' location before flying off.
Arriving back in Silver City, now in a heavily ruined state, Bastian finds Falkor with Atreyu's lifeless body, and uses his penultimate memory of his mother to wish the latter back to life. Shortly afterwards, Xayide arrives with her giants and tries to force Bastian to use his last wish to return home. Rather than do so, Bastian uses his wish for the sorceress "to have a heart". Overcome with compassion, Xayide explodes in a blast of light, destroying her giants and restoring Fantasia. Having been freed, the Childlike Empress thanks Bastian for his help and shows him the way home: a cliff overlooking a waterfall to help Bastian overcome his fear of heights. Encouraged by Barney and Atreyu, Bastian jumps off and returns home safely. As he reunites with his father, AURYN reappears on the front cover of the Neverending Story's book.Jonathan Brandis as Bastian Bux
J. Michael Haney, Jr. as young Bastian
Kenny Morrison as Atreyu
Clarissa Burt as Xayide
John Wesley Shipp as Barney Bux (Bastian's father)
Alexandra Johnes as Childlike Empress
Thomas Hill as Mr. Koreander
Donald Arthur (voice) as Falkor
Martin Umbach as Nimbly
Noah Hathaway (uncredited archival footage) as Atreyu
Producer Dieter Geissler declared he always intended to make a trilogy out of Michael Ende's The Neverending Story, finding the book "just too rich to leave at one film." However, his plans to follow the original film, which only covers half of the novel, had to be postponed as Ende sued Geissler and the production company, insisting that he have a say in any future film treatments of his work. As soon as the legal problems were solved, Geissler started a year-long pre-production working with conceptual artist Ludwig Angerer, to ensure the film's design and technical ambitions would fit into a lower budget, along with averting the problems the first movie faced with its effects. Geissler also hired screenwriter Karin Howard, who contributed 14 drafts until the final screenplay, which draws inspiration from most chapters in the second half of Ende's novel. Geissler opted to invite a director only when the development was finished, as he considered effects-heavy productions "burn a director out real fast when they're in on a picture from the earliest pre-production stages. What I wanted was for the director to come in fresh and not already worn out and to be able to put his ideas on an already solid structure." He eventually brought in the American George T. Miller, who was a fan of the original film. Over 600 children were auditioned, given the original actors were too old for their roles. In contrast to The NeverEnding Story relying on blue screen and scale model creatures, The Next Chapter would have more life-sized model work and matte paintings. Principal photography begun in early 1990 at Bavaria Film near Munich. The original plan was to build three separate stages, having first and second unit shooting simultaneously on the first two stage and have the effects done on the third. But the studio decided not to build the third stage at the last minute, forcing production to shoot first and second unit on the same stage at the same time. As labour rules regarding child actors limited their working schedules, Miller decided to only rehearse scenes once before filming, and maximized the time with the children on set by shooting with as many as three cameras on every scene. This created a problem as Miller's fear of falling late wound up making the film so ahead of schedule the effects team had not completed the necessary work for later scenes.
The film has a 14% score on Rotten Tomatoes based on seven reviews; the average critics' rating is 3.7/10. Richard Harrington of The Washington Post wrote, "Unlike its predecessor, there are few effects in II worthy of being called special, and events unfold with uniform flatness. Silver City feels like Diet Oz, the sorceress's castle is more hinted at than realized and several new creatures are right out of late-night comedy sketches". Chris Hicks, writing for the Deseret News, was more kind in his review, writing that it would be enjoyable to children, whereas the first film was enjoyable to the entire family.
The film grossed $17,373,527 in the United States, but was a bigger success in its native Germany, with 3,231,527 admissions - one of the two German films to achieve domestic success in 1990 along with Werner – Beinhart!, and the seventh largest attendance of the year.