At the beginning of the film, Toy company Heartland Playsystems is acquired by the multinational conglomerate GloboTech Industries, which is expanding from manufacturing high-quality military hardware. GloboTech CEO, Gil Mars, pays a visit to Heartland to meet with Larry Benson and Irwin Wayfair concerning their newest projects, which involve the creation of intelligent, interactive toys.
Irwin introduces the heroic Gorgonites peaceful, kindhearted, heroic creatures built for educational purposes, while Larry introduces the evil Commando Elite. Gil supports Larry's concept more, but complains when he observes a promotional advert for the toys, complaining that the toys cannot actually do what they can do in the advert (e.g. punch a hole through a box). That night, Larry searches through GloboTech's hardware online database and decides to use an intelligent AI munitions computer chip to power the toys, which are put on production.
A collection of the toys are distributed to an old toy store owned by the Abernathy family, their son Alan signing off for the toys. He and a delivery truck driver Joe investigate the toys, introducing the Gorgonites' leader Archer, and the Commando Elite's leader Chip Hazard. Alan falls for his next door neighbor's daughter, Christie Fimple, but she is dating another boy. That night, Alan discovers Archer has somehow sneaks into his rucksack and quickly realizes he is more than an interactive toy but a sentient person, who is following his toy programming and trying to learn. The Commando Elite awaken, and seek to destroy The Gorgonites, seemingly destroying the ones present in the toy store. Discovering Archer is still alive, Chip Hazard and his squad manage to pursue Alan to his home and attempt to kill him and Archer. Alan is attacked by Nick Nitro, whom he mortally wounds using a Garbage dispenser. The Commando Elite retreat to the Fimples' garage, where Nick Nitro dies in Chip Hazard's arms.
Alan and Archer search the toy store for The Gorgonites, eventually finding them in the dumpster outside. Taking them back to his house, Alan learns the group seek their homeland called Gorgon, and mistake Yosemite National Park for their land. The Commando Elite invade the Fimples' house, and turn Christie's collection of Gwendy dolls into mercenaries. They drug Christie's parents, place her younger brother Timmy in a closet, and then capture Christie herself. They send a video message to Alan, telling him to surrender The Gorgonites or Christie will die. Alan and Archer sneak into the Fimples' house to save Christie, and are then pursued down the street by The Commando Elite who use modified vehicles and weapons, but they are all destroyed during the chase except Chip Hazard who locates a truck full of Commandos, driven by Joe.
At Alan's house, Irwin and Larry seek out Alan after gaining a phone call from him regarding the toys. Chip Hazard attacks the house with his new army and a war breaks out between The Commando Elite and the humans inside. During the battle, the humans realize they can fry the toys' chips with an EMP blast. Alan heads out to destroy a nearby power line, Christie, Irwin and Larry head to the Fimples' house to turn all the electronic items to help Alan. The Gorgonites, who have been hiding for most of the film, decide to fight back against The Commando Elite. Chip Hazard confronts Alan on top of the power line pole, briefly battling and defeating Archer. Alan seizes Chip Hazard and tosses him into the power line, causing an EMP blast to kill all of The Commando Elite, Chip Hazard dying in the process.
The next day, Gil arrives and gives the humans paychecks to keep them from suing his company and then leaves with Larry and Irwin. At the end of the film, Alan discovers The Gorgonites survived the EMP blast, and sends them out into Yosemite National Park in a large toy boat to find the land of Gorgon. The song plays during the closing credits is "War" performed by Bone Thugs-N-Harmony. After the closing credits, a short clip of Phil Hartman is shown, followed by the dedication "For Phil".
- Archer - The wise, brave, grand, noble leader of the heroic Gorgonites. As his name suggests, Archer is armed with a crossbow attached to his left arm and a sword.
- Ocula - A shy one-eyed creature and the scout. It can only speak in whistles unlike the others, and does not seem averse to put its only eye in jeopardy.
- 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 and is the only female Gorgonite.
- Insaniac - A very crazed, comedic relief, hyperactive purple creature. His weapon is a Flail.
- Slamfist - Archer's very best sibling. His left hand is replaced by boulder-like fist. His fist and mallet are very powerful and useful weapons.
- Troglokhan - The very handsome navigator with a dagger and club.
- Chip Hazard - The leader of the evil Commando Elite.
- Link Static - The communication expert.
- Brick Bazooka - The artillery expert.
- Kip Killigan - The covert operation expert.
- Butch Meathook - The sniper.
- Nick Nitro - The demolition expert.
- Tommy Lee Jones - Chip Hazard
- Frank Langella - Archer
- Ernest Borgnine - Kip Killigan
- Jim Brown - Butch Meathook
- Bruce Dern - 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 (uncredited)
- Small Soldiers (PS1)!!!!!!!!!!