In a world where toys are living things but pretend to be lifeless when humans are present, a group of toys, owned by young Andy Davis, are caught off-guard when Andy's birthday party is moved up a week, as his family (including his mother and infant sister Molly) are preparing to move the following week.

Andy's toys – including Bo Peep the shepherdess, Mr. Potato Head, Rex the dinosaur, Hamm the piggy bank and Slinky Dog – fear that they will be replaced by new toys from the birthday. Sheriff Woody – the toys' leader and Andy's favorite toy – sends out army men, led by Sarge, to spy on the party and report the gift results to the others with baby monitors. The toys are relieved when the party appears to end with none of them being replaced by new toys, but then Andy receives a surprise gift – a Buzz Lightyear action figure, who thinks that he is a real space ranger.

Buzz impresses the other toys with his various features, and Andy begins to favor him, making Woody feel outcast, compared to the newer, sleeker more advanced Buzz. As Andy prepares for a family outing at a restaurant called Pizza Planet, his mother allows him to bring one toy. Fearing that Andy will choose Buzz, Woody attempts to trap him behind a desk with RC, a radio-controlled car, but ends up accidentally knocking him out of a window. The other toys, except Bo Peep and Slinky, rebel against Woody, condemning him for stranding Buzz out of jealousy and rivalry. Before they can exact revenge, Andy takes Woody and leaves for Pizza Planet. When the family stops for gas, Woody finds that Buzz has hitched a ride on their van.

A fight breaks out which causes the two to fall out of the van and the family leaves without them. They manage to make their way to the restaurant by stowing away on a pizza delivery truck. Buzz gets them stuck in a crane game full of alien toys, after he mistakes it for a spaceship, where they are captured by Andy's neighbor Sid Phillips, a mean-spirited spoiled brat fond of torturing, destroying and incongruently customizing his toys.

While Woody attempts to escape from Sid's house, Buzz finally realizes that he is a toy when he sees a Buzz Lightyear action figure television ad, and sinks into despondency after trying and failing to fly out the window and losing his left arm. Sid plans to launch Buzz on a firework rocket, but his plans are delayed by a thunderstorm. Woody tells Buzz about the joy he can bring to Andy as a toy, restoring his confidence. The next morning, Woody and Sid's mutant creature toys rescue Buzz just as Sid is about to launch the rocket and scare Sid into no longer abusing toys. Woody and Buzz leave just as Andy and his family drive away toward their new home.

The duo try to make it to the moving van, but Sid's dog, Scud, sees them and gives chase. Buzz ends up stranded while saving Woody from Scud, and Woody tries rescuing him with RC. Thinking that Woody is trying to get rid of RC as well, the other toys toss him off the truck. Having evaded Scud, Buzz and RC retrieve Woody as they continue to go after the truck. Upon seeing Woody and Buzz together on RC, the other toys realize their mistake and try to help them get back aboard, but RC's batteries become depleted, stranding them. Buzz realizes that Sid's rocket is still strapped to his back, and they ignite it, hurtling them toward the truck. Woody manages to throw RC back into the truck before he and Buzz soar into the air, and Buzz opens his wings to free himself from the rocket before it explodes, gliding with Woody to land safely into a box in the van, right next to Andy, who thinks they were in the car all along.

On Christmas Day, at their new house, Woody and Buzz stage another reconnaissance mission to prepare for the new toy arrivals. One of the toys is Mrs. Potato Head, much to Mr Potato Head's delight. As Woody jokingly asks what could be worse than Buzz, they discover Andy's new gift is a puppy, and the two share a worried smile.