The game closely follows the plot of Toy Story, with a few minor differences.
It is the day of Andy's birthday party, and his toys are riled up about the possible newcomers and their potential replacement. In an effort to calm their nerves, Sheriff Woody sends a troop of green army men, along with a baby monitor, to report. The mission goes over smoothly; however, they receive an abrupt warning that Andy is returning to his room, sending everyone in a frenzy to return to their positions. Once things have settled down and Andy has left the room, the toys find a lone newcomer: Buzz Lightyear. They, except Woody, are impressed with him and his features, and Hamm decides that Woody and Buzz should have a race to settle their argument. Buzz wins the race, but Woody, still unfazed, challenges Buzz to fly around the room with his eyes closed, which Buzz does. Although Woody convinces himself that he is still Andy's favorite toy, he begins having nightmares about Buzz.
Jealous of all the attention Buzz has been getting, and wanting to be brought by Andy to Pizza Planet, Woody attempts to use R.C. to knock Buzz behind a cupboard, but accidentally knocks him out of a window, drawing the other toys' ire at him. Woody manages to escape from the angered toys with the help of Rex, who dislikes confrontations. Woody is chosen by Andy as the toy to go to Pizza Planet, but during a stop at the gas station, Buzz hops in the van and attacks Woody. Buzz is defeated when Woody traps him in a spare tire. However, Andy and his mother leave, without noticing their absence. Woody and Buzz hitch a ride on a Pizza Planet van to return to Andy. Once there, the two toys disguise themselves as litter and sneak into Pizza Planet, avoiding contact with humans. Buzz sneaks into a claw machine, mistaking it for a rocket to return to his home planet; Woody sneaks in the coin slot and works through the hazardous innards in pursuit. Woody is greeted by the squeaky toy aliens inside, who task him with saving some of their own, lost even deeper inside the machine. Woody is successful with the task and the aliens thank him. However, Sid Phillips, Andy's toy destroying neighbor, notices Buzz in the claw machine and tries to fetch him out. Woody delays Buzz's capture by launching the Aliens at the claw, but is unable to prevent it, and instead goes along with him to Sid's house.
Woody and Buzz try to escape from Sid's room, which is overrun with metal bugs and live firecrackers. Sid occasionally pops in to torture Woody by setting his head on fire, sending Woody dashing for a nearby bowl of cereal to douse it. Woody and Buzz have a run-in with Sid's collection of mutilated toys, keeping them back with Buzz's karate-chop action. Sid decides to destroy Buzz with a large rocket, and takes him away. To save him, Woody then befriends the toys, and riding on the back of Roller Bob, sneaks out into Sid's backyard, dodging various pieces of litter and Sid's dog, Scud. The toys attack Sid and save Buzz, but Andy's family moves out of their house without either toy. Woody manages to catch up to the moving truck, but Buzz falls behind. Woody finds R.C., hops on his back on the road, and drives back for Buzz. Securing him, they proceed to ride R.C. back to the truck. However, R.C. is too slow to get there, so Buzz and Woody light the rocket on Buzz's back, cutting it off once they gain enough airspeed and glide all the way back to the van of Andy's mother. The two toys have gotten over their differences over the course of this adventure, and go on to be good friends in Andy's new house.