One starlit night, in a little alpine village, a wandering insect named Jiminy Cricket makes himself at home in the workshop of a woodcarver named Geppetto, filled with fantastic wooden clocks and music boxes. The kindly old man arrives, accompanied by his kitten Figaro and goldfish Cleo, to put the finishing touches on a wooden marionette, which he names Pinocchio. After trying his puppet out, Geppetto sees that it's getting late and decides to turn in for the night.
Before falling asleep, Geppetto sees a shining star out his window and makes a wish that his puppet would become a real boy. Soon after, a bright light descends from the star and enters the room, revealing itself to be a Blue Fairy, there to grant Geppetto's wish. With a stroke of her wand, Pinocchio comes to life. The fairy explains to him that he'll become a real boy if he proves himself "brave, truthful and unselfish". Jiminy reveals himself to them, and he accepts an offer from the fairy to be appointed Pinocchio's conscience, "lord high keeper of the knowledge of right and wrong".
As Jiminy explains to Pinocchio through song to "give a little whistle" when he needs him, the puppet falls off the table with a loud crash, waking up Geppetto and his pets. Geppetto is elated to see Pinocchio alive and throws a little party, which gets cut short when the curious puppet plays with fire and Geppetto has to extinguish his finger. Geppetto decides it's time for bed, and he tells Pinocchio that he has to go to school tomorrow.
The next morning, Geppetto sends Pinocchio off to school with the other children of the village. Along the way, Pinocchio is spotted by a couple of scoundrels: J. Worthington Foulfellow, a sly fox, and his stooge Gideon, a dumb alley cat. Amazed by the sight of a wooden boy, they scheme to sell Pinocchio to The Great Stromboli's Marionette Show. Foulfellow, or "Honest John" as he likes to be called, convinces Pinocchio to run away with him and become an actor, while Jiminy (who had overslept and arrived late) futilely tries to get him to go to school.
Later that night, Pinocchio performs on Stromboli's stage as his star attraction and, despite a few missteps, proves to be a sensation. A discouraged Jiminy decides that Pinocchio might be better off without him and leaves. But being an actor turns out to be not all that great for Pinocchio; when he attempts to leave, Stromboli locks him in a birdcage, intending to take him on tour and eventually chop him into firewood.
As Geppetto agonizes over his son's disappearance back home, Jiminy sees Stromboli's wagon leaving town and decides to sneak aboard to wish his friend luck. There, he sees Pinocchio predicament and unsuccessfully attempts to pick the lock on the cage. Just as things seem hopeless, the Blue Fairy appears before them and asks Pinocchio why he didn't go to school. Pinocchio tries to save face by telling an outlandish tale, but with each lie he tells, his nose grows longer and longer. An embarrassed Pinocchio apologizes and promises to turn over a new leaf, so the fairy forgives him and, with a tap of her wand, shortens his nose and opens the cage. Pinocchio and Jiminy escape from the wagon and start heading back to the village, unaware that their adventures are just beginning.
Elsewhere, in a waterfront tavern called the Red Lobster Inn, Honest John and Gideon are making a deal with a sinister Coachman, who promises them a hefty sum in exchange for helping him collect "stupid little boys" to take to Pleasure Island. The mere mention of the name frightens them, as it's known that boys who go there don't come back... as boys.
As Pinocchio and Jiminy race for home, he runs into the fox and cat again. They convince him that he's "allergic" and that the only cure is a vacation on Pleasure Island, "that happy land of carefree boys". As they take Pinocchio to the coach, Jiminy spots them and gives chase, stowing away on the coach before it takes off. Meanwhile, Pinocchio meets and befriends a young hoodlum named Lampwick.
Upon arriving on Pleasure Island, the boys are encouraged to partake in all kinds of debauchery, including drinking, smoking and wreaking havoc. Disgusted and suspicious, Jiminy tries to find Pinocchio and bring him home, and eventually finds him and Lampwick in a pool hall. As Lampwick has fun torturing Jiminy, Pinocchio tells him to take it easy on Lampwick because he's his "best friend". Feeling betrayed, a livid Jiminy decides he's had enough and abandons his post.
When Jiminy goes to the dock take the next boat out, he is greeted by the sight of the Coachman and some faceless goons crating little donkeys, some of whom are wearing clothes and can even speak. It doesn't take long for Jiminy to realize that this is what becomes of boys who visit Pleasure Island: that they end up "making jackasses out of themselves". His anger forgotten, the cricket rushes off to find his friend and save him from this horrible fate.
Back at the pool hall, Pinocchio watches in horror as Lampwick turns into a braying donkey right before his eyes, and he suddenly spouts donkey ears and a tail. Jiminy arrives just in time, and the two hurriedly escape Pleasure Island by jumping off a cliff into the sea below.
After swimming all the way back to the village, the two rush for Geppetto's home, only to find that he, Figaro and Cleo are not there. Just then, the Blue Fairy, in the form of a dove, delivers a message from Geppetto, saying that he went out looking for his son on Pleasure Island and had been swallowed by Monstro, "a whale of a whale". Pinocchio decides to go find his father inside the whale and, with a rock tied to his tail and Jiminy at his side, drops down to the bottom of the sea.
The two explore the seafloor and try to ask the creatures to direct them to Monstro, but every time they do, they flee in terror at the mention of his name. They later encounter Monstro chasing a fleeing school of tuna, and Pinocchio ends up getting swallowed, with Jiminy stuck outside. Inside the whale, a hungry Geppetto is fishing for the tuna coming in and ends up reeling in Pinocchio, leading to a heartfelt, yet soggy, family reunion.
Geppetto explains that he has built a raft to escape on, but has accepted that there is no way out. As he suggests starting a fire to cook some fish, Pinocchio gets the idea to use the smoke to make Monstro sneeze them out. Despite Geppetto's skepticism, Pinocchio's plan works, and they are sneezed onto the water. But this isn't the end of their problems, for a furious Monstro starts chasing them and eventually destroys their raft. An exhausted Geppetto tells Pinocchio to leave him and save himself, but Pinocchio gallantly carries him towards a cliff with a small opening leading to the shore, with Monstro coming in fast. Just as Pinocchio enters, the whale hits the cliffside, blasting everyone onto the beach. Jiminy searches the shore for his friend, and he discovers Pinocchio lying lifeless in a pool of water.
Everyone finally makes it home, and Pinocchio's body is laid out on the bed while Geppetto, Figaro, Cleo and Jiminy mourn the loss of their hero. The Blue Fairy from afar acknowledges that Pinocchio has proven himself through his sacrifice. She revives him, turning him into a real live boy. Everyone erupts with joy and celebrates, as Geppetto's wish for a son has been granted at last. Jiminy thanks the fairy, and he receives a reward of his own: a gold badge dubbing him an "official conscience".
