A group of Fairies-in-Training gather to celebrate yet another "perfectly granted" wish of the Blue Fairy ("When You Wish upon a Star"). Their celebration is interrupted by the toy maker, Geppetto, who complains that Pinocchio, the puppet she brought to life as his son, is defective. To uncover the truth, the Blue Fairy takes us back in time to the day of Geppetto's wish. Geppetto's toy shop is filled with parents and their eager children ("Toys"). Having no children of his own, Geppetto envies them and wishes for his heart to be full ("Empty Heart"). The Blue Fairy grants his wish and brings Pinocchio to life.

The next day, the overjoyed Geppetto teaches Pinocchio a song he learned from his father ("Geppetto and Son") and introduces him to the Town Fathers, but Pinocchio wanders away. We then travel forward in time ("Rise and Shine") to see Geppetto attempt to teach Pinocchio about toy making. When the disinterested Pinocchio lies, his nose grows. Still not convinced of Pinocchio's imperfection, the Blue Fairy takes us forward again to Pinocchio's first day of school. Heeding Geppetto's instructions to "act like everyone else," Pinocchio begins mimicking other students and gets into trouble. In the town square, the puppeteer, Stromboli, notices that Pinocchio is a stringless puppet and tries to recruit him for his marionette show, but the Blue Fairy sends Stromboli away.

Back in the present, Geppetto repeats his request for the Blue Fairy to take Pinocchio back. Pinocchio overhears and runs away ("When You Wish upon a Star – Reprise"). Geppetto goes looking for Pinocchio and finds him performing for Stromboli ("I've Got No Strings"). After the show, Stromboli locks up Pinocchio, but tells Geppetto that the puppet left. Meanwhile, Pinocchio escapes, but Stromboli vows to find him ("Bravo Stromboli"). The Blue Fairy finally agrees to take Pinocchio back once Geppetto finds him ("Just Because It's Magic"). In Idyllia, Geppetto encounters Professore Buonragazzo and his "perfect child" machine, which creates a series of perfect children ("Satisfaction Guaranteed"), but none can replace Pinocchio. Back on the road, Geppetto meets talking animals who act like something else because of their parents' expectations. Meanwhile, the Blue Fairy offers Pinocchio to Stromboli since Geppetto still doesn't want him ("Bravo Stromboli – Reprise").

A Ringleader and his Roustabouts introduce us to a children's paradise ("Pleasure Island"). Geppetto finds Pinocchio there, but fails to convince him to come home. Suddenly, Pinocchio and the other delinquents become donkeys and are sent away on a ship, which Geppetto pursues in a rowboat. The young fairy, Sue, conjures a whale to save them, but it swallows Geppetto and Pinocchio. Inside the whale, Geppetto promises to be a better father if they ever get home ("Geppetto and Son – Reprise"). Pinocchio lies so that his nose tickles the whale's throat, and it sneezes them out. Back at the toy shop, Stromboli and the Blue Fairy await them. Having learned how to appreciate fatherhood, Geppetto offers Stromboli anything in his shop in exchange for letting him keep Pinocchio ("Since I Gave My Heart Away"). Stromboli refuses, and the Blue Fairy must grant Stromboli his wish, but the young fairies point out that Pinocchio has learned to become a real boy, rendering him useless for Stromboli's show. With father and son now transformed and united for good, the Blue Fairy's perfect record remains intact!