Jiminy Cricket explains that he is going to tell a story of a wish coming true. His story begins in the Italian workshop of a woodworker named Geppetto. Jiminy watches as Geppetto finishes work on a wooden marionette whom he names Pinocchio. Before falling asleep, Geppetto makes a wish on a star that Pinocchio will be a real boy. During the night, a Blue Fairy visits the workshop and brings Pinocchio to life, although he still remains a puppet. She informs him that if he proves himself brave, truthful, and unselfish, he will become a real boy, and assigns Jiminy to be his conscience.
Geppetto discovers that his wish has come true, and is filled with joy. However, on his way to school, Pinocchio is led astray by Honest John the Fox and his companion, Gideon the Cat, who convinces him to join Stromboli’s puppet show, despite Jiminy’s objections. Pinocchio becomes Stromboli’s star attraction as a marionette who can sing and dance without strings. However, when Pinocchio wants to go home for the night, Stromboli locks him in a birdcage. Jiminy arrives to see Pinocchio and is unable to free him. The Blue Fairy appears and asks Pinocchio why he was not at school. Jiminy urges Pinocchio to tell the truth, but instead, he starts telling lies, which causes his nose to grow longer and longer. Pinocchio vows to be good from now on, and the Blue Fairy returns his nose to its original form and sets him free while warning him that this will be the last time she can help him.
Meanwhile, across town, Honest John and Gideon meet a coachman who promises to pay them money if they can find naughty little boys for him to take to Pleasure Island. Encountering Pinocchio on his way home, they convince him that he needs to take a vacation there. On the way to Pleasure Island, he befriends Lampwick, a delinquent boy. Without rules or authority to enforce their activity, Pinocchio and the other boys soon engage in smoking, gambling, vandalism, and getting drunk, much to Jiminy’s dismay. Later, while trying to get home, Jiminy discovers that the island hides a horrible curse: the boys brought to Pleasure Island transform into donkeys for their misbehavior and are sold to slave labor in the salt mine and circus. Jiminy runs back to warn Pinocchio, only to discover that Lampwick has transformed into a donkey; Pinocchio manages to escape the island, only with donkey ears and a tail.
Upon returning home, Pinocchio and Jiminy find the workshop vacant. They soon get a letter from the blue fairy as a dove, stating that Geppetto had ventured out to sea to save Pinocchio from Pleasure Island, but was swallowed by a giant whale named Monstro, and is now living in his belly. Determined to rescue his father, Pinocchio jumps into the sea accompanied by Jiminy. Pinocchio is soon swallowed by Monstro as well, where he is reunited with Geppetto. Pinocchio devises a scheme to make Monstro sneeze, giving them a chance to escape. The scheme works, but the enraged whale chases them and smashes their raft. Pinocchio pulls Geppetto to safety in a cave before Monstro crashes into it. Geppetto, Figaro, Cleo, and Jiminy are washed up safely on a beach, but Pinocchio is shown apparently lifeless in a rockpool.
Back home, an inconsolable Geppetto weeps over Pinocchio as Jiminy Cricket and the pets also mourn the loss. The Blue Fairy, however, decides that Pinocchio has proven himself brave, truthful, and selfless. To reward him, the Blue Fairy resurrects Pinocchio, reversing the Pleasure Island curse and turning him into a real boy. Pinocchio awakens and reveals that he is alive and a real human boy, much to everyone’s joy. As everyone celebrates, Jiminy steps outside to thank the Fairy and is rewarded with a solid gold badge that certifies him as an official conscience.