Woody is an old-fashioned talking cowboy doll and one of many toys owned by a young boy named Andy. As Andy's favorite toy, Woody enjoys a position of influence and respect among the other toys, essentially acting as their de facto leader. The other toys are an assorted group, but include a snarky Mr. Potato Head, a piggy bank named Hamm, a cowardly but big-hearted dinosaur named Rex, a Slinky Dog, a porcelain doll of Little Bo Peep, an remote controlled race car named RC, and a platoon of Green Army Men.
With Andy's family moving out in a week, his mother has arranged a birthday party ahead of the move. Birthdays and Christmases are stressful times for the toys, as they are faced with the prospect of new toys replacing them, but Woody reassures them that they won't be. To put their minds at ease, he dispatches the Army Men to take a baby monitor to the party and relay information on what toys are being opened.
The toys in Andy's room listen anxiously as each present is opened and are relieved that it seems like a fairly uneventful party- the presents consisting mainly of new clothes and board games. However, Andy's mother pulls out a surprise present, causing panic. Before the toys can find out what this present is, Andy is reported to be returning to the room, forcing the toys to lay still to avoid being caught moving.
After a flurry of activity between Andy and his friends in the room, the toys investigate the present Andy received. Standing on Woody's spot on Andy's bed is a new action figure: Buzz Lightyear, a space ranger toy.
Oddly, Buzz believes himself to be a real space ranger. Nonetheless, he proves very popular among the toys with his myriad features, including a voice box similar to Woody's, an arm-mounted laser, and wings. Buzz believes the wings to really be capable of flying, which Woody tries to correct. Buzz claims he could fly around the room "with [his] eyes closed" and proceeds to bounce and fly around the room, not under his own power, but as a result of several conveniently-timed coincidences. Even then, the other toys are impressed. Woody, however, feels himself secure in the knowledge that come what may, he would remain Andy's favorite toy.
Unfortunately for Woody, he is soon proven wrong: at the same time that his popularity among the other toys wanes, Andy begins to prefer Buzz Lightyear. Cowboy memorabilia is replaced with Buzz Lightyear merchandise, and Woody finds himself relegated to the toy box as Buzz takes his place by Andy's side in his bed.
One day, Andy's mom decides to take him to a family pizzeria called Pizza Planet. With Andy only allowed to take one toy, Woody makes a plan to knock Buzz behind Andy's desk, hiding his rival from view so Andy would have to take him instead. The plan, however, goes horrifically awry and Woody accidentally knocks Buzz out of Andy's bedroom window. The other toys witness this and suspect Woody was trying to get rid of Buzz due to his jealousy. Before they could mete out vigilante justice, however, Andy returns. Unable to find Buzz, Andy decides to take Woody with him instead.
Andy's family stops at a gas station to refuel while Woody finds himself trying to figure out how to explain his actions to the other toys as an accident. He is confronted by Buzz, who caught a ride by hanging onto the underside of the car, and their brawl spills out onto the parking lot. Unfortunately for them, while they were fighting, Andy's family's car drove off without them. Thankfully, a Pizza Planet truck is nearby, and the two hitch a ride on the truck to Pizza Planet.
The two make their way through the pizzeria in search of Andy. Unfortunately for them, Buzz is distracted by a crane game shaped like a rocket ship and jumps inside. Woody follows him inside, and both are confronted by their worst nightmare: Sid Phillips, Andy's neighbor and a boy who was infamous for destroying toys for his own sick amusement. Unable to reveal they were living to anyone, Woody and Buzz have little choice but to let Sid collect them.
Once in Sid's house, they are approached by toys that Sid had altered into nightmarish abominations. Watching them encircle two toys that Sid mutilated, they believe these toys to be cannibals and hide.
Over the next couple of days, Woody and Buzz try to find a way to escape from Sid's house and make their way back to Andy's. While Buzz is searching for an escape, he happens upon a commercial on the TV advertising Buzz Lightyear action figures. The reality begins to sink in: Buzz is not a space ranger, but a toy. Refusing to believe it to be true, Buzz tries to fly from the second story of the house, only to fall and have his left arm broken off.
Woody later finds Buzz being played with by Sid's younger sister, Hannah, at a tea party. After distracting Hannah, Woody goes in to retrieve Buzz, who is practically mad with grief over finding out he was only a toy. Woody notices an open window facing Andy's room and calls out to Andy's other toys, who remain suspicious of Woody after what happened to Buzz. Woody attempts to smooth things over by telling them Buzz was fine, but with Buzz still catatonic, Woody tries using his broken-off arm to convince the other toys. Unfortunately, they see through the deception when Woody accidentally reveals the arm was broken off. The other toys accuse Woody of murdering Buzz and leave him.
The "cannibal" toys them appear and surround Buzz, taking his arm from Woody. Woody pulls them off, only to find that the abominable toys were not eating Buzz, but fixing him by putting his arm back on. In truth, they were only trying to help other toys Sid mutilated, and were actually very shy and skittish.
There's little time to try and win them over, however, as Sid returns to his room with a package he ordered; a large flying firework called "The Big One", which he decides to tape to Buzz and send him flying and exploding. His wicked plan is put on hold, however, as a rain storm prevents Sid from launching the firework. Instead, he plans to do it the following morning.
As Andy is saddened by Woody and Buzz's inexplicable disappearance, Woody, finding himself trapped under a milk crate, asks Buzz to help him so they can escape. Buzz, however, has fallen into depression over the fact that he was a toy and not a space ranger; his entire life had been a lie. Woody tries to cheer him up by telling him how cool of a toy he is, and in so doing, comes to the realization that, in spite of his jealousy, Buzz really was a better toy than Woody. With all of Buzz's cool features, how could Woody hope to stand beside him with only an old-fashioned pull-string voice box? Believing he should've been the one strapped to Sid's rocket, Woody tells Buzz to go ahead and escape without him.
Woody's words of encouragement, however, reach through to Buzz, and together, they work to liberate Woody. Just as Woody is freed, however, Sid's alarm clock goes off. He awakens and takes Buzz out to be destroyed. With no time to lose, Woody asks the other abominable toys for his help in saving Buzz.
As Sid prepares to light the firework and destroy Buzz, he can suddenly hear Woody's voicebox seemingly malfunction. As Sid prepares to dispose of him, however, Woody begins to address Sid directly. He finds himself surrounded by the other toys he mutilated and, faced with his own cruelties, becomes fearful as Woody warns him to "play nice".
Scared out of his wits, Sid runs back into the house, now afraid of toys. As Andy's moving van pulls out and begins to leave, Woody and Buzz give chase, while Sid's toy-destroying dog, Scud, chases them in turn. Buzz throws himself onto Scud to distract him while Woody makes his way into the moving truck to find a way to help Buzz in turn. The other toys watch as Woody pushes a remote-controlled car out to help Buzz, but mistake his actions as another act of murder and throw him out.
Woody uses RC to chase after the moving truck with him and Buzz onboard. The two manage to lose Scud at an intersection. The other toys, upon seeing Woody with Buzz and RC, finally believe Woody and try to help. Unfortunately, RC runs out of battery power, and Woody and Buzz find themselves stranded and abandoned. However, Woody has one idea left; warming his hand off of the focused sunlight from Buzz's helmet, Woody lights the rocket on Buzz's back. The rocket blasts Woody, Buzz, and RC down the road, allowing them to return RC to the moving truck before flying into the air.
Just as it seems they would be destroyed by the rocket, however, Buzz uses his wings to cut the tape. They begin to fall until Buzz pulls up and begins to glide through the air, giving them the opportunity they need to make their way to Andy's mother's van and finally reunite Andy and his two favorite toys.
Having learned a valuable lesson in the dangers of jealousy and how important a toy is in a child's life, Woody, Buzz, and the other toys no longer dread Christmases and birthdays, now seeing them as opportunities to make new friends, with the Army Men's reports on present openings met with excitement- particularly when Mr. Potato Head learns that Andy has received a Mrs. Potato Head. When Andy announces he got a new puppy for Christmas, Woody and Buzz have a nervous smile and embrace for another wild adventure with a dog.