A Hawaiian girl named Lilo Pelekai is expelled from hula school for pushing her bully Mertle off stage due to frustration over her sister Nani's absence. Their social worker, Mrs. Kekoa, visits and finds Nani unfit to care for them, demanding she complete her tasks in a week.

The next day, hearing that Lilo wants a friend, their neighbor Tūtū takes Lilo to the animal shelter where 626 is kept. Realizing Jumba and Pleakley are after him, 626 impersonates as a dog and allows Lilo to adopt him for his protection. Nani takes them to her resort lūʻau job with her friend David Kawena. Lilo names 626 "Stitch" after Nani comments on having to stitch a car seat he tore. They enjoy the resort, but Stitch accidentally causes a table fire, leading to Nani's dismissal.

Nani is visited by Kekoa and Cobra Bubbles, a CIA agent posing as a social worker to investigate Stitch's arrival. Kekoa insists that Nani find new employment immediately. However, she is rejected after many interviews due to Lilo and Stitch's antics. Lilo helps Nani secure a job as a surfing instructor, and they enjoy surfing after her first shift. Meanwhile, Jumba and Pleakley fail to capture Stitch while jet skiing, causing the Pelekais and Stitch to wipe out, almost drowning Lilo when Stitch sinks.

After Lilo's recovery, Kekoa informs Nani that the Hawaiian government will cover her health insurance costs if she relinquishes her guardianship—a decision she reluctantly accepts. As the sisters share a final night together, Stitch reflects on his actions and sorrowfully returns to the animal shelter alone. Meanwhile, the Grand Councilwoman, frustrated with Jumba's failure to capture Stitch, cancels their deal and orders Pleakley to return Jumba to prison. However, Jumba escapes Pleakley and plans to capture Stitch instead.

Kekoa and Bubbles arrive the next morning to find that Lilo is missing, so they and Nani start searching for her. Lilo finds Stitch at the shelter, but Jumba arrives to recapture Stitch. They escape to the Pelekais' home and fight Jumba, destroying their house. During the fight, Jumba reveals that Stitch used Lilo for his protection, leading to guilt-ridden Stitch's surrender.

Jumba takes Stitch aboard his spaceship using a portal-generating gun, intending to erase Stitch's newfound empathy. However, Lilo sneaks aboard and frees Stitch, and they eject Jumba from the ship. The ship crashes into the ocean, trapping Lilo and Stitch underwater. Stitch rescues her, but as he cannot swim to the surface, he releases her to let her emerge and drowns.

Nani and David rescue Lilo, but she refuses to leave Stitch. David returns Lilo to shore while Nani swims back to get Stitch from the ocean floor. They reach shore, but Stitch remains motionless. After Bubbles finds Pleakley and they rejoin the group, David revives Stitch by jump-starting his lungs. Shortly after, the Grand Councilwoman arrives and re-arrests Jumba. After seeing Stitch's change of heart, she decides to let Stitch exile on Earth with his newfound 'ohana. The Grand Councilwoman vows to keep in touch, with Pleakley living with the Pelekais to watch over Stitch.

As Pelekais, Stitch, and company return home, Kekoa tells Nani she can transfer Lilo's guardianship to David and Tūtū, letting her stay home. The 'ohana then repairs the house and lives happily. Nani, now attending the University of California, San Diego to study marine biology with Lilo's blessing, uses Jumba's portal gun to visit Lilo and Stitch in Kaua'i.