After singing the film's signature song "When You Wish Upon A Star", Jiminy Cricket explains that he is going to tell a story of a wish coming true. His story begins in the Tuscany 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 could be a real boy. During the night, the star, in the form of a Blue Fairy, visits the workshop to grant Geppetto's wish. She gives Pinocchio the breath of life, although he still remains a puppet. The fairy informs Pinocchio that if he desires to become a real boy of blood and flesh he must prove himself to be brave, truthful and unselfish and able to tell right from wrong by listening to his conscience. Pinocchio does not understand what a conscience is, so Jiminy appears to explain it to him. The Blue Fairy asks if Jiminy would serve as Pinocchio's conscience, a task he accepts.
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 convince 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 with no strings while performing with marionettes of Dutch girls, French can-can girls, and Russian Cossacks. However, when Pinocchio wants to go home for the night, Stromboli becomes angry and locks him in a birdcage and threatens him to perform around the world and warns him that when he grows too old, he will chop him into firewood. Jiminy arrives to see Pinocchio and is unable to free him. When the Blue Fairy then appears and asks Pinocchio why he disobeyed Geppetto, despite Jiminy's urgings, Pinocchio invents a story in order to hide his shame, and with each lie his nose grows ever longer. The Blue Fairy explains that a lie will keep growing and growing until it's as plain as the nose on his face. Pinocchio vows to be good from now on and the Blue Fairy restores his nose back to its original form and sets him free, warning that this will be the last time she helps him as Pinocchio and Jiminy escape. Meanwhile, across town, Honest John and Gideon meet a coachman who promises to pay them big money if they can find him stupid little boys to take to Pleasure Island. They convince Pinocchio that he is sick, and the only cure is to go there as a vacation. There, he befriends Lampwick, a misbehaved disillusioned boy. With no rules or authority to stop them, Pinocchio and the other boys soon enjoy gambling, smoking, getting drunk and vandalizing, much to Jiminy's dismay. Jiminy becomes angry when he discovers that Pinocchio is friends with Lampwick and storms off. Later, Jiminy discovers the island harbours a terrible curse which the Coachman used to manipulate the boys into making jackasses of themselves by becoming real live donkeys, selling them to work in the salt mines and circuses. Jiminy runs back to warn Pinocchio, only to find Lampwick transformed into a terrified donkey, but Pinocchio manages to escape with only a donkey's ears and tail.
Upon returning home, Pinocchio and Jiminy find the workshop empty and learn (from a letter by the Blue Fairy in the guise of a dove) that Geppetto, while venturing out to sea to look for Pinocchio, had been swallowed, along with his cat Figaro, and goldfish Cleo, by a giant whale named Monstro, and are now living in his belly. Determined to rescue his father, Pinocchio jumps into the bottom of the ocean, with Jiminy accompanying him. Pinocchio is soon swallowed by Monstro, where he is reunited with Geppetto. Pinocchio devises an escape plan by burning wood in order to make Monstro sneeze. The plan works, but the enraged whale gives chase and smashes their raft. Pinocchio refuses to abandon Geppetto and pulls him to safety in a cave under a cliff before Monstro rams into it. They are all washed up on a beach, but Pinocchio is dead. Back home, the group mourn for him. The Blue Fairy, however, decides that Pinocchio has proven himself brave, truthful, and unselfish, and he is reborn as a real human boy, much to Geppetto's joy and they dance around the workshop to celebrate while Jiminy, proud of Pinocchio as well, steps outside to thank the Fairy, and is rewarded a solid gold badge that certifies him as an official conscience
- The Monstro tunnel, as it appears in the Disney Parks attraction Storybook Land Canal Boats, is a building object in Toy Box.
- Pinocchio and Jiminy Cricket appear as costumed townspeople.