A group of toys, who are sentient when humans aren't around, are preparing to move into a new house with their owner Andy Davis, his sister Molly and their single mother. Sheriff Woody, Andy's favorite toy and their de facto leader, sends Sarge and his green army men to spy on Andy's birthday party with a baby monitor, as the toys are nervous about him receiving new toys that could replace them. The other toys include Mr. Potato Head, Slinky Dog, Rex the tyrannosaur, Hamm the piggy bank, and Bo Peep the porcelain doll). Andy receives a Buzz Lightyear action figure who believes he is an actual Space Ranger and does not know he is a toy. Buzz impresses the others with his hi-tech features and becomes Andy's new favorite toy, making Woody jealous.

Two days before the move, Andy's family plans for a dinner at Pizza Planet. To ensure Andy brings him along and not Buzz, Woody tries using the radio-controlled car RC to knock Buzz behind the desk, but accidentally knocks him out the bedroom window instead. The other toys believe Woody deliberately tried to kill Buzz. Andy takes Woody and a furious Buzz confronts him in the car. The two fight, fall out of the car, and are left behind.

They hitch a ride to the restaurant on a Pizza Planet delivery truck. Buzz mistakenly believes a claw crane full of Little Green Men to be a true rocket. Andy's sadistic next-door neighbor Sid, who destroys toys for fun, captures the two from the crane and takes them to his house, where they encounter his Bull Terrier Scud and his abused "mutant" toys made from parts of other toys he has destroyed.

Buzz is shocked by a TV commercial that reveals he is indeed a toy. He attempts to fly but falls, breaks his arm, and has a mental breakdown. After Sid's toys fix Buzz, Sid tapes Buzz to a rocket, planning to blow him up the next morning. Woody helps Buzz realize that his purpose is making Andy happy, restoring Buzz's resolve. Sid takes Buzz out to blow him up but Woody rallies the mutant toys to frighten Sid into never harming toys again.

Now freed, Buzz and Woody pursue Andy's moving truck, but Scud gives chase. Woody climbs into the truck and pushes RC out to rescue Buzz. The other toys, still thinking Woody has killed Buzz, toss him back out. Buzz and Woody pursue the truck on RC, and the other toys see them and realize their error. RC's batteries run out, forcing Woody to ignite the rocket strapped to Buzz. Buzz opens his wings to sever the tape just before the rocket explodes; he and Woody fall through the sunroof of Andy's car, landing safely inside.

At the Christmas gift-opening in the new house, Mr. Potato Head is delighted when Molly gets a Mrs. Potato Head. Woody and Buzz jokingly ponder what gift could be "worse" than Buzz, only to nervously smile at each other when Andy gets a dachshund puppy.