The movie begins with an action scene of Sheriff Woody apprehending the Bonnie-&-Clyde train robbers Mr. & Mrs. Potato Head. As the runaway train with the hostages goes over the bombed bridge, Buzz Lightyear comes to the rescue, but is overpowered by the evil Dr Porkchop's spaceship. Just as things start to look bad for the heroes, we are flipped back to reality, where we realize the action sequence was a make-believe adventure of kid Andy playing with his toys.
A montage through a handheld camera is shown of Molly & Andy growing up over the years. The toys are now kept in a toy chest. We see Sarge and his bucket of soldiers sneak something in a sock and bringing it to the chest where Woody, Jessie, Buzz and the other toys await. They remove the item in the sock - it's a cell phone. Using the cordless phone, they dial it & it rings...and they freeze. The chest opens & it's Andy, except he's all grown up. He takes out the phone (thinking it's Molly his baby sister who snuck it there) & closes the chest. We then realize the toys hatched the plan to get Andy to notice them & play with them, something that hasn't happened in a long time. The toys know that Andy is going off to college in 3 days' time and they worry about their uncertain future, that they will no longer be wanted. Woody tries to reassure them but he is not so sure himself. We also learn that some of the other toys like Wheezy penguin & Bo Peep have been yard-sold over the years. Sarge and his team abandon the toys and take off in parachutes, knowing that at the next yard-sale, they would be the first to go.
Mom comes in & nags Andy to set aside what's for trash & what's for the attic, giving his impending departure for college. She opens the chest of toys and asks him what he is going to do with them, whether he wants to throw or donate them away. Andy replies no, and loudly says no one would want this old junk. After his mom leaves, he starts to clear up his room. He sees the toys, pauses a while & then begins putting them into a trash bag, all except Woody, who's placed in the box labeled "college". The toys in the trash bag, including Buzz, start to panic. Woody fears their fate, until he sees Andy bring the bag to the attic with the intention of keeping/storing them. However, he gets distracted by Molly (who has also put Barbie for donation) & leaves the bag behind. Mom sees the bag & mistakes it for trash. Woody sets out to rescue the toys and tries to tell them the truth (that Andy meant to keep /store them not throw them away) but even after they escaped, the toys make their way to the donation box instead as they don't believe Woody, still believing that Andy has deliberately thrown them away. Jessie convinces the toys should take charge of their own destiny and a better fate at the daycare await them, as Woody vainly attempts to explain Andy’s true intentions. They are all then donated to Sunnyside childcare.
The gang arrives at Sunnyside just as the children leave for recess. All looks promising as Sunnyside has many children & the new toys are welcomed warmly by the resident toys and their leader, Lotso the bear. Barbie meets a very metro-sexual Ken & falls in love at first sight. Andy's toys have been assigned to the Caterpillar playroom & are led to believe they will be played & loved daily, as they saw how the toys were treated with love and care in the Butterfly playroom. The toys think Woody should stay with them at Sunnyside, but Woody reluctantly leaves to find Andy. On his way out, he meets a toy Telephone on wheels, who hints that things are not all that meets they eye. Woody manages to escape but at the last bit he gets caught in a tree; he is rescued by Bonnie and brought home (his hat gets left behind), where he is adored and played with by Bonnie. Her existing toys - Dolly, a pony, a Shakespearean porcupine always in character, Peas in a Pod and a triceratops Trixie welcome him to their brood. He is happy to be played with again and making a child happy but misses his friends and Andy.
Back at Sunnyside childcare, Andy's toys are anticipating a joyous afternoon of playtime. Just as the daycare kids are about to be released into the room, Buzz notices the existing toys hiding and quivering in fear. Before he can suspect further, as it happens, the kids belonging to the Caterpillar playroom are hyperactive 1-2 years toddlers and they thrash, beat up and graffiti the toys in their exuberance. The Potato Head couple gets the worst treatment, literally being dismantled. Buzz rounds the group up and suggests he talks to Lotso to get reassigned to the Butterfly Playroom, where the kids are older and know how to treat toys well.
However, as he manages to sneak into the other rooms, he overhears the real plot, where Lotso and his gang have their secret meeting in the vending machine. Turns out new toys are 'sacrificed' to the Caterpillar room and the better toys get the better treatment in the Butterfly playroom. Buzz is captured when he refuses to give in to their terms, which is to leave his friends in the other room and get thrashed about by the kids every day. The gang then pry open Buzz's control panel and puts him in Demo mode, where he once again thinks he's a Space Ranger and he turns against his friends, as he thinks they are helping Emperor Zurg and that Lotso is his commander. Barbie breaks up with Ken after learning he is part of that gang and she gets imprisoned as well. Mrs. Potato Head's missing eye, left behind at Andy's room, sees Andy going to the attic and his look of dismay and realizes that Woody was telling the truth. The toys lament that a life in the attic would’ve been a better deal after all.
Back at Bonnie's, Woody tells Bonnie's toys that he wants to go back to Andy. When they learned he escaped from Sunnyside, Woody then learns the real story behind Lotso and Sunnyside from Chuckles the Clown (he's rather dour). He tells them that Lotso was once loved by Daisy, a girl, who accidentally left him, Chuckles and Big Baby behind. By the time they made their way back to Daisy, Lotso has been replaced with a new bear. His sadness at the betrayal turns to rage and cynicism and he bullies Chuckles and big baby into leaving Daisy altogether. Once at Sunnyside, he and Big Baby quickly rose to power (via bullying) and set up the daycare into a lifetime toy prison for those left there. Fortunately for Chuckles, he was saved because he was damaged and taken home by Bonnie. Woody quickly realizes that he must save his friends and return to Andy before he leaves for college.
Woody returns to Sunnyside via Bonnie's backpack and enlists the help of the Telephone on wheels to recap the escape plan. Telephone informs Woody of the security measures and guard details that Lotso has every night to circumvent any escape by any toy. Most importantly, there is a monkey toy with cymbals that keep watch over the security monitors who reports to Lotso and watches everything that happens in the daycare through cameras. Woody then appears to his friends and together they hatch their escape.
Nighttime, their elaborate plan unravels: Prison Break!!! Hamm piggy bank and Rex set up a mock fight to distract Buzz who is keeping watch over them. They trap him under a toy box. Barbie pretends to be contrite for breaking up with Ken and gets him to trust her again, pretending to be interested in his clothing range but she then knocks him down and blackmails him into telling her what Lotso did to Buzz and heads to get the instruction manual. Mr. Potato Head pretends to escape so that he is rounded up by Lotso's gang and pretends to give them a hard time for taking him back. The monkey in the security room is distracted by this and does not see Woody and Slinky dog escaping. They proceed to the security room and take out the monkey with cellophane tape before he can alert Lotso. Mr. Potato Head is thrown into the sandbox where he escapes by dismantling his eyes & hands through the sandbox hole; however, he needs a 'body' to reattach his eyes and hands, and Jessie throws him a tortilla from a left behind lunchbox. He makes his way to the window outside the Butterfly playroom to keep watch on Lotso. Woody gets the keys to all the rooms and the gang proceeds to change Buzz back to play mode. However, Rex incidentally holds down the reset button for more than 5 seconds, configuring Buzz in Spanish mode. Woody tells Spanish Buzz that they are his amigos (Friends). Buzz sees Jessie and is smitten once again - being Spanish, he launches into a series of moves to impress here, including romantic words and a Flamenco dance.
Mr. Potato head's Tortilla body gets pecked apart from a pigeon and he only manages to rejoin the group using a zucchini. J The toys make their escape, but at the last moment as they are about to get away, Lotso finds and corners them. Ken speaks up and convinces everyone that it was Lotso who turned Sunnyside into a prison instead of a joyful place for toys. Lotso asserts that they are all discards, but Woody speaks up and reminded Big Baby that he was never replaced; it was only Lotso who was. He returns Big Baby's tag but Lotso gets mad and crushes it; Big Baby sees this and gets angry that he was always tricked and throws Lotso in the dumpster. The dumpster truck is approaching and just as everybody is about to escape, one of the three green pizza planet aliens (adopted kids of the Potato Heads) gets caught in the dumpster lid. Woody turns back to help but gets pulled into the dumpster by Lotso, prompting the rest of the gang to save Woody but they all end up getting thrown into the garbage truck heading to the landfill.
While trying to save Jessie from the tumbling garbage, Buzz is hit by an old TV and is returned to his normal self. They arrive at the landfill and the 3 aliens mistake the landfill claw for their spaceship (partly due that they were from a toy machine which used the claw to drop down and pick up toys as prizes). The group drops into the conveyor belt with all the garbage and cling onto magnetic items (a magnet is used to separate metallic items before being chopped up). Lotso is trapped under some heavy item and begs for help. Woody softens and helps him, however, it's just another trick and Lotso leaves them behind after pretending that he was reaching for the Emergency Halt button to stop the conveyor belt leading to the incinerator, leaving the gang to face impending death. As they approach the flames, they resign to their fate and hold hands…………when suddenly they are rescued by the "claw", which the three little aliens are controlling. Lotso is later found on the roadside by a garbage man, who says he once had a bear just like him, and ties him to the front of his garbage truck. (What a fate!) Woody, Buzz and the gang find the garbage truck that travels by Andy's house and manages to return home in time before Andy leaves for college. They all say their farewells and get to their respective boxes, Woody bound for college and the others bound for the attic. Just as Andy arrives, Woody realizes he wants a better life for his friends than in the attic, so he writes Bonnie's address on a Post-it and leaves it for Andy to see. Andy, instead of taking his beloved toys to the attic, takes them to Bonnie. She is very shy and to break the ice, he introduces each and every one of them to her, telling her how special they are to him. When he is done, Bonnie looks in the box and sees Woody and exclaims "my cowboy! There's a snake in my boot!" Andy is stunned (as he thought he placed Woody in his college box), but as he tunes Woody up and sees Bonnie's face of yearning; he knows that she will take care of and love them. Together, Bonnie plays with Andy and her new toys and just at the end of the day, Andy finally leaves for college, but not before whispering a sincere "thank you" to the toys for all the great times and special memories.
Closing credits - Jessie plays a Spanish song that gets Buzz involuntarily dancing the Paso Doble (he doesn’t realize he has a Spanish mode).
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