Terry first worked for Bray Studios in 1916, where he created the Farmer Al Falfa series. He would then make a Farmer Al Falfa short for Edison Pictures, called "Farmer Al Falfa's Wayward Pup" (1917), and some later cartoons were made for both Paramount Pictures and 20th Century Fox.
Around 1921, Terry founded the Fables animation studio, named for its Aesop's Film Fables series, in conjunction with Amadee J. Van Beuren. Fables churned out a Fable cartoon every week for eight years in the 1920s. In 1928, Van Beuren, anxious to compete with the new phenomenon of talking pictures, released Terry's Dinner Time (released October 1928). Van Beuren then urged Terry to start producing actual sound films, instead of post-synchronizing the cartoons. Terry refused, and Van Beuren fired him in 1929. Almost immediately, Terry and much of his staff started up the Terrytoons studio.
Through much of its history, the studio was considered one of the lowest-quality houses in the field, to the point where Paul Terry noted, "Disney is the Tiffany's in this business, and I am the Woolworth's." Terry's studio had the lowest budgets and was among the slowest to adapt to new technologies such as sound (in about 1930) and Technicolor (in 1938), while its graphic style remained remarkably static for decades. Background music was entrusted to one man, Philip Scheib, and Terry's refusal to pay royalties for popular songs forced Scheib to compose his own scores. Paul Terry took pride in producing a new cartoon every other week, regardless of the quality of the films.Following the success of Disney's Snow White and the Seven Dwarfs Paul Terry considered doing an animated feature film on his own. However, after seeing the failure of Max Fleischer's Mr. Bug Goes to Town, and the additional failures of Disney's Pinocchio and Fantasia he decided to abandon the project. Until 1957, screen credits were very sparse, listing only the writer (until 1950, solely John Foster, then Tom Morrison thereafter), director (Terry's three main directors were Connie Rasinski, Eddie Donnelly and Mannie Davis), and musician.
Terrytoons' first distributor was Educational Pictures, specialists in short-subject comedies and novelties. The Paramount Pictures Film company (known as Paramount Pictures) and The Fox Film company 20th Century Fox) released Educational shorts to theaters in the 1930s, giving the Terry cartoons wide exposure. Farmer Al Falfa was Terry's most familiar character in the 1930s; Kiko the Kangaroo was spun off the Farmer Al Falfa series. Most of the other cartoons featured generic animal characters. One of the stock designs was a scruffy dog with a black patch around one eye; Terry ultimately built a series around this character, now known as Puddy the Pup.
Paul Terry may have realized that Educational was in financial trouble, because he found another lucrative outlet for his product. In 1938 he arranged to release his older cartoons through home-movie distributor Castle Films. Educational went out of business within the year, but 20th Century-Fox continued to release Terrytoons to theaters for the next two decades. With a new emphasis on "star" characters, Terrytoons featured the adventures of Super Mouse (later renamed Mighty Mouse), the talking magpies Heckle and Jeckle, silly Gandy Goose, Dinky Duck, mischievous mouse Little Roquefort, and The Terry Bears.
Despite the artistic drawbacks imposed by Terry's inflexible business policies, Terrytoons was nominated four times for the Academy Award for Animated Short Film: All Out for V in 1942, My Boy, Johnny in 1944, Mighty Mouse in Gypsy Life in 1945, and Sidney's Family Tree in 1958.
The studio was sold outright by the retiring Paul Terry to CBS and  in 1955, but both Paramount Pictures (PP) and 20th Century Fox (TCF) continued to distribute the studio's releases. The following year, CBS put it under the management of UPA alumnus Gene Deitch, who had to work with even lower budgets.
Deitch's most notable works at the studio were the Tom Terrific cartoon segments for the Captain Kangaroo television show. He also introduced a number of new characters, such as Sick Sick Sidney, Gaston Le Crayon, John Doormat, and Clint Clobber. Deitch brought much creativity and life to the Terrytoons cartoons, but because he was only 31 years old when he came to the studio, he wasn't entirely welcome. An internal battle was fought by studio stalwarts and Deitch was forced out. Soon after Deitch moved to Prague where as of March 2011 he continues to live and work.
After Deitch was fired in 1958, Bill Weiss took control of the studio. Under his supervision, Heckle and Jeckle and Mighty Mouse went back into production. Besides the three core directors of the Terry era who were still involved as animators and directors, two Famous Studios stalwarts joined the crew, Dave Tendlar and Martin Taras. Other new theatrical cartoon series included Hector Heathcote, Luno and Hashimoto San. In addition, the studio began producing the Deputy Dawg series for television in 1960. Another television production for the Captain Kangaroo show was The Adventures of Lariat Sam, which was written in part by Gene Wood.
Phil Scheib continued as the studio's musical director through the mid-1960s when he was replaced by Jim Timmens and Elliott Lawrence.
The most notable talent at Terrytoons in the 1960s was animator/director/producer Ralph Bakshi, who got his start with Terrytoons in the 1950s and later helmed the Mighty Heroes series. Bakshi left Terrytoons in 1967 for Paramount, which closed its cartoon unit later that year. He would later go on to produce Mighty Mouse: The New Adventures for television in 1987.
After the departure of Bakshi after 1966, the studio petered out and finally closed in 1968. However, the film library was still regularly rereleased to theatres by Paramount Pictures and Fox, thus ensuring its existing cartoon library a long life in TV reruns.
The Terrytoons cartoons (especially Mighty Mouse and Deputy Dawg) were syndicated to many local TV markets, and they were a staple of after-school and Saturday morning cartoon shows for over three decades, from the 1950s through the 1980s, until the television rights to the library were acquired by USA Network in 1989. They have seen relatively little air time since then.
In the late '70s, Filmation Studios licensed the rights in order to make a new Mighty Mouse series. Later in 1987, Ralph Bakshi produced Mighty Mouse: The New Adventures which lasted for two seasons. Bakshi and John Kricfalusi inspired the staff to try to get as much Jim Tyer-style drawing in the show as possible. Tyer, a stand-out Terry animator of the original cartoons with a unique style, became a strong influence on the artists of the Bakshi series.
In 2002, the Terrytoons characters returned to television in original commercials for Brazilian blue cheese (for what is now America's Dairy Farmers) and a fine wine.
Through the years that have followed since the last Terrytoons TV series material in 1988, the rights have been scattered as result of prior rights issues and corporate changes involving Viacom (the ownership and distribution history is noted below). However, some Terrytoons shorts are believed to be in the public domain, and have been issued on low-budget VHS tapes and DVDs. The first official release of any Terrytoons material by CBS DVD and FOX DVD have been announced (Mighty Mouse: The New Adventures was issued January 5, 2010).
- Independent (1928–1955, as company);
- Columbia Broadcasting System, Inc. (1955–1971, as company and underlying rights to library);
- Viacom, Inc. (1971–2006, underlying rights to library);
- News Corporation (1971–2006, underlying rights to library);
- CBS Corporation/CBS Television Studios a division of CBS Corp. (2006–present, underlying rights to library).
- FOX Corporation/FOX Television Studios a division of FOX Corp. (2006–present, underlying rights to library).
- Educational Pictures (1930 until 1936);
- Paramount Pictures (theatrical rights, 1936 until 1994);
- 20th Century Fox (theatrical rights, 1936 until 1994);
- Paramount Pictures (theatrical rights, 1994–2006; and from 2006 forward, theatrical rights only on behalf of CBS and FOX);
- 20th Century Fox (theatrical rights, 1936 until 1994);
- CBS DVD - through Paramount Home Entertainment (home video and DVD rights);
- FOX DVD - through 20th Century Fox Home Entertainment (home video and DVD rights);
- CBS Television Studios through Fox Television Distribution (television syndication rights, 2006–present).
- CBS Television Studios through Paramount Television Distribution (television syndication rights, 2006–present).