Woody, a pull-string cowboy doll, is the leader of a group of toys that belong to a boy named Andy Davis and come to life when humans are not seen. With his family moving to a new house and having a birthday party for Andy, the toys stage a reconnaissance mission to discover Andy's new presents. Andy receives a space ranger Buzz Lightyear action figure, whose features replace Woody's position as Andy's favorite toy. Buzz does not know that he is a toy when Woody tries to convince him and thinks that he is a real space ranger. While the other toys befriend Buzz, Woody hates Buzz and he doesn't want Buzz to become Andy's favorite toy.
Andy prepares to go to a family outing at Pizza Planet with Buzz. Woody attempts to replace Buzz so that Woody's position is taken, but knocks him out a window instead, making the toys mad. Andy takes Woody to Pizza Planet with him instead. However, Buzz climbs into the car and confronts Woody when they stop at a gas station. The two toys fight and accidentally fall out of the car, which drives off and leaves them behind. Woody sees a pickup truck bound for Pizza Planet and plans to rendezvous with Andy there, convincing Buzz to come with him by saying that the pickup truck can take him to his home planet. Once at Pizza Planet, Buzz makes his way into a claw game machine shaped like a spaceship, thinking that it is the ship that Woody had promised him. Inside, he finds a horde of squeaky aliens who revere the machine's claw arm as their master. When Woody follows Buzz into the game to try to rescue him, the two of them are captured by Andy's next door neighbor, Sid Phillips, who likes to torture and destroy toys for fun.
The two toys try to escape from Sid's house before Andy and his family move, encountering nightmarish hodge-podge toys of Sid's creation as well as Sid's vicious dog, Scud. Buzz sees a commercial for Buzz Lightyear action figures just like himself and realizes that Woody was right about him being a toy. Unable to face the truth, Buzz tries to prove he is still a space ranger by attempting to fly out of the window, but falls and loses one of his arms. Buzz becomes too depressed over the truth to participate in Woody's escape plan which forces Woody to try and get the other toys attention in Andy's room by waving Buzz's disconnected arm, but the other toys still distrust him for what happened to Buzz and leave him behind. Woody realizes that Sid's mutant toys are friendly when they fix Buzz's arm but is forced to hide when Sid arrives, leaving Buzz behind. Sid prepares to destroy Buzz by strapping him to a rocket, but is delayed by a thunderstorm and sleeps for the night. Woody convinces Buzz life is worth living even if he is not a space ranger because of the joy he can bring to Andy, and helps Buzz regain his spirit. Cooperating with Sid's mutant toys, Woody stages a rescue for Buzz and scares Sid away by coming to life in front of him. However, the two miss Andy's car as it drives away to his new house.
Running down the road, they climb onto a moving truck but Scud chases them and Buzz tackles the dog to save Woody. Woody attempts to rescue Buzz with Andy's RC car but the other toys, who think that Woody got rid of RC, toss Woody off onto the road. Spotting Woody driving RC back with Buzz alive, the other toys realize their mistake and try to help them into the truck. When RC's batteries become depleted, Woody ignites the rocket on Buzz's back and manages to throw RC into the moving truck just in time before they go soaring into the air. Buzz then opens his wings to cut himself free before the rocket explodes, and he and Woody glide through the air and land safely into the car. Andy looks in the box and is relieved to have found Woody and Buzz.
On Christmas Eve at their new house, Buzz and Woody stage another reconnaissance mission to prepare for the new toy arrivals, one of which is a Mrs. Potato Head, much to the delight of Mr. Potato Head. Woody jokingly asks Buzz "What could Andy possibly get that is worse than you?", a question which is immediately answered; Andy's new gift, as it turns out, is a puppy, and the two share a worried smile.