Top defense contractor GloboTech Industries acquires the Heartland Toy Company and as part of the move, Globotech CEO Gil Mars tells Heartland toy designers Larry Benson and Irwin Wayfair to develop actual live-action toys capable of "playing back". Mars selects Larry's soldiers, the Commando Elite, for the project and Irwin's educational creatures, the Gorgonites, for their enemies, with the toy line 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 X1000 microprocessor to control the toys.
Teenager Alan Abernathy 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 for the Gorgonites and Chip Hazard for the Commando Elite. Alan's neighbor and love interest, Christy Fimple, 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, break out of their boxes 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 horrified to discover the X1000 was designed for smart munitions guidance; a Globotech engineer reveals the AI circuit is designed to learn over time in the boundaries of their programming, enhancing it, but mass production was scrapped due to issues with Electromagnetic pulse shielding.
Meanwhile, Chip and his squad pursue Alan to his home, capture Archer and hang him over the garbage disposal in an attempt to kill him unless he tells them where the remaining Gorgonites are. Alan however hears their voices and enters the kitchen where he sees what the Commandos are doing. While the other Commandos flee, Alan is attacked by Nick Nitro, whom he mortally wounds by shoving him into the garbage disposal. His parents, Stuart and Irene, arrive at the kitchen, having been alerted by the sounds of the scuffle there. Alan attempts to explain what is going on, but with Archer not supporting his explanation, neither of his parents believe him. The next day, Alan and Archer find the rest of the Gorgonites in a dumpster at the store. At home, Alan learns that the primary goal of the Gorgonites is to seek their homeland Gorgon, which they mistakenly believe to be in Yosemite National Park. Through tapping the Abernathys' phone line, the Commandos learn of Alan's interest in Christy and decide to take her hostage, immobilizing the Fimples' household to force Alan into surrendering the Gorgonites.
Alan and Archer sneak into the Fimples' house to save Christy, but run into her Gwendy dolls, whom Chip has engineered as auxiliary troops. The Gwendys quickly subdue Alan. Archer cuts Christy loose from her bonds, and together, they save Alan and destroy the Gwendys before escaping with the Commando's kit-bashed vehicles in hot pursuit. However, they are all destroyed during the chase. The two teenagers and Archer return to Alan's house, only to find her family and his parents waiting for them, believing that Alan kidnapped Christy and immobilized the Fimples. This time, Stuart and Irene believe Alan and Christy's account of the Gorgonites and the Commandos (with help from the other The Gorgonites to support their story), but Christy and Timmy's parents Phil, and Marion, Christy's mother aren't completely convinced. Irwin and Larry arrive and talk to Alan about the complaint he had made. At that moment, Chip, who survived the chase, attacks the house with a new force of Commandos, having hijacked Joe's shipment and equipped with more improvised vehicles and weapons, and a battle breaks out trapping the Gorgonites and human's inside and cutting off the house's electricity supply.
Having been guided by Irwin's advice to create an EMP blast, Alan heads out to force an overload of the power lines. Christy, Irwin, and Larry head to the Fimples' house to turn on all electronic items inside and wedge the power transformers open for a larger surge. At Archer's command, despite the fact that they were programmed to lose and the Commandos were programmed to win, the Gorgonites exit the house and fight back against the Commandos. Chip flies to the top of the power line pole to stop Alan, where he briefly battles and defeats Archer, but finds himself thrust by Alan into the power line, triggering the EMP blast, which kills Chip]] along with all of the remaining Commandos.
Mars arrives in his helicopter during the police and fire department cleanup the next day. He pays Joe, the Fimples, and the Abernathys for damages, as well as buying their silence from the media, and orders Larry and Irwin to prepare the Commandos for sale to rebels in South America. Among the craziness of the aftermath, Alan and Christy part on highly amicable terms, now having agreed to start a relationship with each other. Alan later discovers that the Gorgonites have shielded themselves from the EMP blast by hiding underneath the Fimples' large satellite dish. The Abernathys bring the Gorgonites to Yosemite National Park, where Alan sends them out in a large toy boat from his father's store to find their island home of Gorgon.
- Archer - The wise, brave, grand, noble leader of the Gorgonites. As his name suggests, Archer is armed with a crossbow attached to his left arm and a sword.
- Troglokhan - The very handsome navigator with a dagger and club.
- Slamfist - Archer's very best hunchback-like sibling with a boulder for his left hand. His fist and mallet are very powerful and useful weapons.
- Ocula - A shy, scouting, one-eyed creature. She can only speak in whistles unlike the others, and does not seem averse to put her only eye in jeopardy.
- Insaniac - A very crazed, comedic relief, hyperactive, purple creature. His weapon is a Flail.
- Punch-It & Scratch-It - constant, inseparable creatures. Punch-It resembles a humanoid Megacerops with a claw gauntlet, while Scratch-It looks like an orange legless creature who resembles a frog and moves on her hands. She sits on Punch-It when traveling.
- Chip Hazard - The leader of the Commando Elite.
- Nick Nitro - The demolition expert.
- Butch Meathook - The sniper.
- Brick Bazooka - The artillery expert.
- Link Static - The communication expert.
- Kip Killigan - The covert operation expert.
- Tommy Lee Jones - Chip Hazard
- Frank Langella - Archer
- Ernest Borgnine - Kip Killigan
- Jim Brown - Butch Meathook
- Bruce Dean - Link Static
- George Kennedy - Brick Bazooka
- Clint Walker - Nick Nitro
- Christopher Guest - Slamfist/Scratch It
- Michael McKean - Insaniac/Troglokhan
- Harry Shearer - Punch It
- Jim Cummings - Ocula