Donner, Santa's lead reindeer, and his wife have a new fawn named Rudolph. They are surprised to find out he was born with a glowing red nose. Donner attempts to first cover Rudolph's nose with mud, and later uses a fake nose, so Rudolph will fit in with the other reindeer. The following spring, Rudolph goes out for the reindeer games, where the new fawns learn to fly and are scouted by Santa for future sleigh duty. Rudolph meets a doe named Clarice, who tells him he is cute, making Rudolph fly. While he celebrates with the other bucks, Rudolph's fake nose pops off, causing the other reindeer to mock him and Coach Comet to expel him.

Rudolph meets and joins Hermey, a misfit elf who left Santa's workshop because he wants to be a dentist, and Yukon Cornelius, a prospector who has spent his life searching for silver and gold. After escaping the Abominable Snow Monster, all three land on the Island of Misfit Toys. It is a place where unloved or unwanted toys reside with their ruler, a winged lion named King Moonracer, who brings the toys to the island until he can find homes and children who will love them. The king allows them to stay one night on the island and asks them to ask Santa to find homes for them. Rudolph leaves on his own, worried that his nose will endanger his friends.

Time passes and Rudolph, now a young stag, returns home to find that his parents and Clarice have been searching for him. He then travels to the Abominable's cave, where they are being held captive. Rudolph attempts to rescue Clarice until the monster knocks him down with a stalactite. Hermey and Yukon eventually show up with a plan to help out Rudolph. Hermey lures the monster out of the cave by imitating the sound of a pig and pulls out the Abominable's teeth after Yukon knocks him out. Yukon drives the toothless monster back over a cliff and falls with it.

Rudolph, Hermey, Clarice, and the Donners return home where everyone apologizes to them. Yukon returns with a tamed Abominable, now trained to trim a Christmas tree, explaining that the monster's bouncing ability saved both of their lives. Christmas Eve comes and while everybody is celebrating, Santa announces that a big snowstorm is approaching, forcing him to cancel Christmas. Blinded by Rudolph's bright nose, he changes his mind and asks Rudolph to lead the sleigh. Rudolph accepts, and their first stop is the Island of Misfit Toys, where Santa delivers the toys to children.