As Andy prepares for a family outing at a space-themed restaurant named "Pizza Planet", his mother tells him he can only bring one toy; Woody attempts to be picked instead of Buzz by trapping Buzz in a gap behind Andy's desk, but the plan goes disastrously wrong when he accidentally knocks Buzz out the window, resulting in the other toys accusing him of murdering Buzz out of jealousy. With Buzz missing, Andy reluctantly takes Woody to Pizza Planet, but Buzz climbs into the car, confronting Woody when they stop at a gas station; the two then fight, falling out of the car, which drives off and leaves them behind. Woody spots a Pizza Planet delivery truck and plans to rendezvous with Andy there, convincing Buzz to come with him by telling him it'll take him to his home planet. Once at Pizza Planet, Buzz makes his way into a claw game machine shaped like a spaceship, mistaking it for the ship Woody promised him. Inside, he finds squeaky aliens who revere the claw arm as their master. Woody clambers into the machine after Buzz, but they are interrupted when Andy's neighbor, Sid Phillips, arrives and operates the machine. Spotting a Buzz Lightyear amidst the squeaky aliens, Sid maneuvers the claw to pick up Buzz. In the ensuing struggle the aliens force Buzz and Woody towards the claw, and they are captured; Woody is horrified because of Sid's reputation for torturing toys.
At Sid's house, the two attempt to escape before Andy's moving day, encountering Sid’s nightmarish toy creations and his vicious bull terrier, Scud. Buzz sees a commercial for Buzz Lightyear action figures, and realizes that he really is a toy. Disbelieving, he attempts to prove he can fly, but instead plummets down the stairs, losing his left arm. Upset, Buzz is unable to cooperate with Woody. Woody waves Buzz's arm from a window to seek help from the toys in Andy's room, but they are horrified thinking Woody had indeed murdered Buzz when they see Buzz's disconnected arm, while Woody realizes Sid's toys are friendly when they reconnect Buzz's arm. Sid prepares to destroy Buzz by strapping him to a rocket, but is interrupted by a thunderstorm. Woody convinces Buzz that life is worth living because of the joy he can bring to Andy, which helps Buzz regain his spirit. Cooperating with Sid's toys, Woody rescues Buzz and scares Sid away by 'breaking a few rules' and coming to life in front of him, warning him to "play nice". Woody and Buzz then wave goodbye to the mutant toys and return home through a fence, but miss Andy's car as it drives away toward his new house.
Down the road, they climb onto the moving truck containing Andy's other toys, but Scud chases them, bites down on Woody's leg and tries to pull him off; Buzz tackles the dog to save Woody. Woody attempts to rescue Buzz with Andy's RC car, but the other toys, who think Woody had now got rid of RC together with Buzz, attack Woody and toss him off onto the road. After Scud is trapped in a 4-car pile up, Woody drives RC back with Buzz alive, and the other toys, realizing their mistake, try to help them get in the truck. However, they fail as RC's batteries become depleted, but Woody ignites the rocket on Buzz's back and manages to throw RC into the moving truck before they soar into the air. Buzz opens his wings to cut himself free before the rocket explodes, gliding with Woody to land safely into a box in Andy’s car; Andy glances inside and is elated to have found his two missing toys.
On Christmas Day at their new house, Buzz and Woody stage another reconnaissance mission to prepare for the new toy arrivals, one of which is a Mrs. Potato Head, much to the delight of Mr. Potato Head. As Woody jokingly asks what might be worse than Buzz, the two share a worried smile as they discover Andy's new gift is a puppy.