The film opens with Jiminy Cricket sitting in a library singing "When You Wish Upon A Star". Addressing the camera, he starts to tell the audience why he believes in such a thing. Opening up a storybook of "Pinocchio", he explains how he came to the house of woodcarver Geppetto and his pets Figaro the cat and Cleo the fish. Geppetto has just made a little wooden puppet called Pinocchio, whom he loves dearly ("Little Wooden Puppet"). Before he goes to bed, Geppetto wishes upon the evening star that Pinocchio would become a real, live boy. As Geppetto sleeps, the Blue Fairy arrives and grants the wish partially; Pinocchio has come to life, but he is still a puppet and must prove himself worthy before becoming a real boy. However, being naive, he requires some guidance, and the Blue Fairy appoints Jiminy Cricket to be his "conscience". The cricket tells Pinocchio that anytime he needs Jiminy, all he needs to do is whistle ("Give a Little Whistle").
The next morning, Geppetto sends his son off to school. But Jiminy Cricket is still asleep! Pinocchio, alone and full of good intentions, heads off to school, but is sidetracked by the wily fox John Worthington Foulfellow and his simpleton accomplice Gideon the cat. Recognizing his uniqueness, the smooth-talking crooks decide to sell Pinocchio to marionette master Stromboli, whose travelling show is in town. Convincing Pinocchio that this is his chance to become an actor, Honest John and Gideon take the puppet to Stromboli ("Hi-Diddle-Dee-Dee"). Jiminy Cricket jumps in and tries to stop Pinocchio from being taken away, but he is too late; Pinocchio becomes a success as part of Stromboli's show, dancing alongside normal puppets in a European-themed musical extravaganza ("I've Got No Strings"). Jiminy Cricket, feeling that he failed at his job, walks off into the night.
Pinocchio tries to return home to Geppetto. Stromboli, not wanting to lose such a cash cow, locks the puppet in a bird cage. Alone in Stromboli's dark and damp caravan, Pinocchio whistles for Jiminy Cricket. He finds Pinocchio, but is not strong enough to unlock the bird cage. Suddenly, the Blue Fairy appears. Not wanting to admit he was naughty, Pinocchio tells a series of lies, but with every lie his nose grows longer. The Blue Fairy forgives him and lets him out of the cage, but warns him that he'll never become human if he keeps misbehaving. (She also restores his nose to its original size.)
Pinocchio and Jiminy Cricket escape from Stromboli and head for home. Yet it isn't long before the duo become separated, and once more Pinocchio bumps into Honest John and Gideon, who have been hired by a dubious coachman to round up boys to take to the anarchic Pleasure Island amusement park. Jiminy, realising that once again he has been too late, follows Pinocchio to Pleasure Island, where boys can be naughty as much as they like and treat themselves to beer and cigars. But there's a catch to all this; since they are acting like jackasses, the magic of the island gradually turns them into donkeys, which the coachman sells into a lifetime of humiliation and slavery in circuses and mines. Pinocchio starts to change into a donkey, growing long ears and a tail, but before the transformation is complete he manages to flee the horrible amusement park, and returns home. To his dismay, his father isn't there.
A dove arrives with a note from the Blue Fairy explaining that Geppetto has gone to sea to search for his lost son and has been swallowed by the whale Monstro. Determined to save his father, Pinocchio and his reluctant conscience journey to the bottom of the sea. They find Geppetto in the belly of the whale, and escape by setting a fire in the belly of the sea monster, who sneezes them right out. In revenge, Monstro destroys Geppetto's raft. Without regard for his own safety, Pinocchio saves Geppetto from drowning but at the cost of his own life. Geppetto's wish is finally granted. Pinocchio's sacrifice has proved to the Blue Fairy that he is worthy, and he is brought back to life not as a puppet but as a real live boy.
While Geppetto, Pinocchio, Figaro and Cleo celebrate, Jiminy Cricket steps outside to look at the wishing star. The cricket has now also proved himself to be a good conscience, and receives a gold badge.