In a small turn-of-the-century town, a couple designated by the names 'Jim Dear' and 'Darling' are celebrating Christmas. Darling is overjoyed to receive a Cocker Spaniel puppy, whom she names Lady.
Time passes, and Lady is well-taken care of by her owners, who delight in her company. At 6 months, she is given a collar with a license. Lady then goes to visit two neighboring dogs, Jacques and Trusty. Jacques is a wily Scottish Terrier, and Trusty is an old Bloodhound. The two compliment Lady on her new license, before Lady rushes off to greet Jim Dear, who has come home from work.
Time passes on, and one day, Jacques and Trusty come to visit Lady, and find her feeling depressed. Lady explains that something seems to have happened to Jim Dear and Darling. She then explains how one day after coming home, Jim Dear referred to her as 'that dog.' Another time, she tried to playfully take a ball of yarn from Darling, who then struck Lady. Jacques and Trusty soon explain to Lady, that her owners are expecting a baby. Lady is unsure what a baby is, but the two explain what they know. However, their speech is soon interrupted by a mangy grey dog named Tramp.
Tramp then explains that babies are 'homewreckers,' and that Lady can expect to be lectured frequently, and sent to the doghouse in the yard. Jacques angrily orders Tramp to leave, but Tramp just smiles, as if he knows the truth to the whole thing.
Time passes, and lady observes all manner of changes, from strange people entering the house, to Jim Dear leaving early in the morning to get something for Darling. Finally, the baby arrives, and Lady feels even more alone, as her owners spend all their time with 'it.' One day, out of curiosity, Lady goes into the new nursery, where Jim Dear and Darling show her the new baby. Lady is intrigued by the little baby boy, and her owners give her some reassuring pats on her head, signs that they still love her as well.
Sometime afterward, Jim Dear and Darling take a small trip, and leave their son and Lady in the care of Aunt Sarah. However, Aunt Sarah has no tolerance for dogs, and prefers the company of her Siamese cats, Si and Am. When the cats end up causing a mess, Lady is blamed, and taken to a pet store for a muzzle. The experience frightens Lady, and she runs from the pet store. Unsure what to do, she ends up in a bad part of town, where she is chased by 3 large dogs. At the last moment, Tramp appears, fighting them off. Upon seeing the muzzle on Lady, he offers to help her get it off. After sneaking into the local zoo, they manage to trick a beaver into thinking the muzzle is a 'log-hauler.' The beaver gets the muzzle off, and uses it to help him finish his dam.
Tramp then takes Lady to a restaurant named Tony's where the owner (Tony) and his cook Joe prepare a meal for the two dogs. After dinner, the two stroll through the night, and fall asleep at a local park.
When they awake, Lady is upset for not going home right away. Tramp tries to 'open her eyes' to life without leashes and fences. However, Lady feels a responsibility to watch over the baby. Tramp takes her home, but along the way, decides to have a little fun by rousing up a henhouse that he sees. When the owner appears with a shotgun, Tramp and Lady make a run for it. Lady doesn't get far, when she's caught by a dogcatcher, and taken to the pound.
Once inside, she is ridiculed for her license and cleanliness, before another female dog named Peg gets everyone to stop. Talk then turns to the Tramp, who still hasn't been caught and (to Lady's shock), appears to have known quite a number of female dogs.
Eventually, Lady is released to Aunt Sarah, who ties Lady to the dog house out back. Jacques and Trusty come over, hoping to cheer her up, but the mood is spoiled when Tramp appears. Jacques and Trusty leave, and Lady lets her pent-up emotions out on him, from the embarassment of being being in the pound, to hearing about the other women Tramp has been with.
Tramp leaves, but Lady's attention is soon drawn to a rat, that she sees enter through an open window in the baby's room. Lady barks, trying to get Aunt Sarah's attention, but the old woman thinks that Lady is just making a racket. Tramp hears Lady, and after she explains what has happened, he enters the house. Making his way to the baby's room, he confronts and fights the rat, finally killing it, just as Lady arrives after freeing herself from her leash.
Aunt Sarah finds them in the room, and thinks that they were intending to attack the baby. After locking Tramp in a closet, Aunt Sarah puts Lady in the cellar, before calling the pound.
Shortly thereafter, Jim Dear and Darling return, to see Tramp being led away by the dogcatcher, claiming he attempted to attack the baby. Trusty and Jacques hear this and assume the worst as well. However, once Jim Dear looks in the baby's room, he finds the dead rat, and it soon is apparent that Lady and Tramp were trying to protect the baby.
Jacques and Trusty rush off to stop the wagon before it reaches the pound. After spooking the wagon's horses, the wagon overturns, but ends up injuring Trusty.
Time passes, and soon it is Christmas again. Tramp has been made a member of the family, and he and Lady have puppies of their own. Jacques and Trusty (with a cast on his leg) come to visit them as well, and they celebrate the holidays together.