Top defense contractor GloboTech Industries acquires the Heartland Toy Company and as part of the move, Globotech CEO Gil Mars (Denis Leary) tells Heartland toy designers Larry Benson (Jay Mohr) and Irwin Wayfair (David Cross) to develop actual live-action toys capable of “playing back”. Mars selects Larry’s action figures, the Commando Elite, for the project and Irwin’s educational toys, the Gorgonites, for their enemies, with the toyline expected to hit the market in three months. Faced with such a tight deadline, Benson forgoes safety testing, then uses Irwin’s password and chooses GloboTech’s overly powerful X1000 microprocessor to control the toys.
Teenager Alan Abernathy (Gregory Smith) signs off for a shipment of the toys at his family’s toy store without his father’s consent. He and delivery driver Joe activate the leaders for each group – Archer (Frank Langella) for the Gorgonites and Chip Hazard (Tommy Lee Jones) for the Commando Elite. Alan’s neighbor and love interest, Christy Fimple (Kirsten Dunst), buys Chip as a birthday present for her brother Timmy. Alan returns home to discover Archer in his backpack; he realizes Archer is sentient, but in the meantime, the Commando Elite awaken and apparently destroy the Gorgonites in the toy store. Alan calls the company and files a complaint. Later, when Larry and Irwin listen to Alan’s voice mail, Irwin is terrified to discover the X1000 was designed for smart munitions guidance; a Globotech engineer reveals the AI circuit is designed to learn over time, but mass production was scrapped due to issues with EMP shielding.
Meanwhile, Chip and his squad pursue Alan to his home and attempt to kill him and Archer; unlike the Gorgonites, the Commando Elite do not understand they are just toys. Alan is attacked by Nick Nitro (Clint Walker), whom he mortally wounds. The next day, Alan and Archer find the rest of the Gorgonites in a dumpster at the shop. At home, Alan learns the primary goal of the Gorgonites is to seek their homeland Gorgon, which they mistakenly believe to be in Yosemite. The Commandos learn of Alan’s interest in Christy and decide to take her hostage, immobilizing the Fimple household to force Alan into surrendering the Gorgonites.