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 (Denis Leary) pays a visit to Heartland to meet with Larry Benson (Jay Mohr) and Irwin Wayfair (David Cross) concerning their newest projects, which involve the creation of intelligent, interactive toys.
Irwin offers the Gorgonites, peaceful creatures whose mission is to gather information about Earth, prompting children to learn with them, whereas Larry presents the Commando Elite, a special task force of action figures. Despite Irwin's objections, Mars chooses the ugly-looking Gorgonites as the Commando Elite's enemies and imposes a three-month deadline, which Irwin protests as 'impossible' due to the rigorous testing and design period required.
Through Larry's inexperience with the GloboTech database, he commits a critical mistake: rather than standard toy-related computer chips, the action figures are fitted with surplus X-1000 "intelligence" chips designed for use by the military.
Three months later, schoolboy Alan Abernathy (Gregory Smith) and his parents Stuart (Kevin Dunn) and Irene (Ann Magnuson) have moved to Cleveland, Ohio, hoping for a fresh start after Alan's expulsion from two schools for playing practical jokes. His father Stuart owns an unpopular traditional toy store that does not sell electronic toys or violent action figures. Stuart goes on a business trip, leaving Alan in charge of the store, hoping that Alan will prove worthy of his trust. During his absence, Alan sees a box containing Commando Elite and Gorgonite toys bound for another larger toy store, and convinces the delivery truck driver Joe (Dick Miller) to leave him a complete set of each to sell, so as to make the shop wealthier and more sophisticated. Joe initially resists, but relents after Alan pleads with him. When released from their boxes, the toys become animated and begin to wage war against each other. Alan's neighbor and romantic interest Christy Fimple (Kirsten Dunst) visits the store with her younger brother Timmy (Jacob Smith) who stumbles across the feuding toys in the back room, and is shot by Elite Commander Chip Hazard. Because the toys' weapons are merely imitations, he is not hurt and pleads his sister to buy one of them. Alan and Christy later lock up the store and part ways, while the Gorgonite leader called Archer (voiced by Frank Langella) hides in Alan's backpack.
During the night, Chip Hazard (voiced by Tommy Lee Jones) activates the others of the Commando Elite consisting of Kip Killagan (voiced by Ernest Borgnine), Brick Bazooka (voiced by George Kennedy), Butch Meathook (voiced by Jim Brown), Nick Nitro (voiced by Clint Walker), and Link Static (voiced by Bruce Dern). Chip issues functional weapons, and orders all Gorgonites in the store to be destroyed. During the ensuing melee, the Commandos and Gorgonites make a mess. The Gorgonites, who are programmed to lose any battle with the Elite, hide in a garbage dumpster behind the store.
At Alan's house, Alan discovers Archer in his backpack; but the Gorgonite refuses to respond in any 'intelligent' manner. Eventually, Alan realizes that the X-1000 is, in fact an 'intelligent' computer chip that is capable of learning, reasoning, and adapting, and has turned the former 'toys' into artificial intelligence.
The next day, at Archer's direction, Alan finds the remains of one destroyed Gorgonite Troglokhan, but no sign of the Commando Elite or the remaining Gorgonites. Alan manages to repair most of the damage done to the store by their fight and calls the company to complain about the Commandos' actions, but receives an apathetic response and is transferred to a voice-mail machine, where he leaves an angry message but is unable to record his telephone number.
Archer tries to talk to Alan, but the furious Alan tells Archer to 'shut up and stop talking'. Archer obeys and remains silent until later in the night.
Alan and Archer headhome on Alan's bike, but are closely followed by the Commando Elite. Brick Bazooka is sent to assassinate Archer, and is caught in the bike's wheel and has his legs and hips torn off by the spokes. After reparing Brick, Chip notes Alan's House and orders the Commando Elite to move in. During the night, the Commandos enter the house, capture Archer, and interrogate him in the kitchen over the garbage disposal. Alan awakens, saves Archer, drives off the Commando Elite, and jams Commando Nick Nitro into the garbage disposal, destroying him from the knees down. Nick escapes out the window while Alan is caught by his parents, to whom he is forced to confess his illegal acquisition of the toys.
The parent-to-son discussion becomes a heated argument when Alan asserts that the toys were responsible for his father's crafting tools missing, leading his parents to suspect he might be using drugs and regressing to his mischievous lifestyle. Alan, furious at Archer for not supporting him, demands why he did not speak up to prove to his parents that the toys are alive, to which Archer responds by repeating Alan's earlier command to 'shut up'. Alan worries that he will suffer losses of others' trust if the Gorgonites have been destroyed, whereupon Archer replies that the Gorgonites must be alive, because the Commandos are still seeking them.
The Commandos regroup in the Fimples' garage next-door, where Chip Hazard delivers a stirring, noticeably incoherent speech to his followers. Nick crawls his way into the garage and dies in Chip's arms. He then announces that Alan, for rescuing Archer, must be eliminated. The Commandos begin to convert all the sharp tools, electronics, and other hardware into makeshift vehicles and miniature weapons of mass destruction.
Alan returns to the toy store in the morning and retrieves Gorgonites Slamfist (voiced by Christopher Guest), Ocula (vocal effects done by Jim Cummings), Punch-It (voiced by Harry Shearer), Scratch-It (also voiced by Christopher Guest), Insaniac (voiced by Michael McKean), and finds Troglokhan, who has been repaired by the Gorgonites as Freakenstein (also voiced by Michael McKean) from parts of Alan's father's radio. They thereafter use his computer to seek out their imagined homeland of Gorgon.
That night, the Commando Elite tap the phone lines and discover Alan and Christy's relationship. They enter Christy's room while she is away and find her collectible Gwendy dolls. Chip retrieves Nick Nitro's body and tear open his head to find his X-1000 chip. They create a Frankenstein-esque laboratory in her room to raise the Gwendy dolls, using Nick's chip as their mindset. With the "reinforcements" lying in ambush, they drug Christy's parents Marion (Wendy Schaal) and Phil (Phil Hartman), tie up her brother, and scare off her visiting sweetheart Brad (Jonathan Bouck), then force Christy to a hostage video demanding the surrender of the Gorgonites. Alan and Archer trick the Commandos by putting an old radio into a cardboard box, playing a tape of supposed Gorgonites debating the merits of an idea. They rescue Christy after defeating the Gwendy dolls (voiced by Sarah Michelle Gellar and Christina Ricci) animated by the Elite in battle.
The Commandos blast their way out of the garage on their vehicles and pursue Christy, Alan, and Archer, who escape on Christy's motor scooter. In the chase, all the Elite crash into a pond and are destroyed. Chip, however, survives the crash with part of his face melted and floats downstream to a local toy store. Chip then hijacks a shipment of new Commando Elite figures by forcing the driver to Alan's house.
As the parents meet and begin arguing about what has happened, Larry and Irwin of the toy company arrive in response to Alan's earlier phone call. They have learned about the dangers of the X-1000 chip (and a possible weakness) from its designer, and are trying to circumvent any lawsuits.
Returning to the Abernathy home, Chip Hazard activates dozens of Commandos and declares war on the Gorgonites and their human allies, whom they attack by cutting off the electricity supply and then shooting nails, flaming tennis balls, and firework rockets at the house. The humans are frantic and scared until Irwin and Larry recall that an electro-magnetic pulse might deactivate the X-1000 chip: desperate to find an available source thereof, Mr. Fimple suggests connecting a power-transformer in parallel, resulting in an explosion. Alan sends Christy, Larry, and Irwin to Fimple's house to turn on every single piece of Mr. Fimple's massive assembly of electronic components, so that the power will be flowing to overload the transformer. He then prepares to go out into the 'warzone' to complete this task himself, only to be stopped by his father, who wishes to protect him. Alan disobeys his father and goes to activate the E.M.P. Nearby, the Gorgonites override their program and decide to achieve victory, then set out to do so.
Chip Hazard flies after Alan in a toy helicopter, but Freakenstein hijacks one of the vehicles and uses its weapons to shoot it down. Before it crashes into the Fimples' new satellite dish, Hazard ejects himself from it and attempts to knock Alan down. The situation changes when Archer confronts Hazard; after a brief fight, Hazard kicks Archer from the pole. In retaliation, Alan grabs Hazard and jams him between the transformers to activate the E.M.P., destroying the Commando Elite and their doll allies. The Gorgonites survive by hiding beneath a fallen satellite-signal receiver and are discovered later by Alan.
The next morning, Gil Mars arrives to bribe all witnesses to the crisis into silence. Larry is fearful to lose his job, but Mars proposes that they increase the price of the Commando Elite and sell them to the military of a South American nation. Alan and Christy kiss passionately. At the end of the film, the Gorgonites set out in search for their home, Gorgon, on Stuart's model ship in a river in Yosemite National Park.
(Source: WikiPedia. Bangs_McCoy)