Late one night in December, a young boy named Derek Quinn, William Thorne finds a Christmas present addressed to him on the porch. His father Tom Quinn, Van Quattro opens the gift and finds a musical orb shaped like Santa Claus; he activates it, causing it to strangle him with retractable cords. As Tom struggles, he slips and falls onto a fireplace poker, his impaled body being found by his wife Sarah Quinn, Jane Higginson a few moments later.
Two weeks later, Sarah takes Derek, who has been mute since his father's death, to a toy store owned by the elderly Joe Petto, Mickey Rooney, a World War II veteran, and his odd son Pino, Brian Bremer, not realizing Noah Adams, Tracy Fraim a recently discharged fellow soldier, has followed them.
After Derek rejects all the toys shown to him, Derek and his mother leave, prompting Joe to angrily yell at Pino, blaming him for the store's recent failures. While running from his father, Pino bumps into Noah, who buys some toys before leaving. At his home, Noah begins taking apart the toys to inspect their mechanics when he is confronted by his landlord Harold, Gerry Black.
Late paying rent, Noah gives Harold a Larry the Larvae toy in exchange for a one-day extension. While driving home, Harold is killed when Larry the Larvae crawls into his mouth and bursts out his eye.
The next day, Derek finds another gift on his porch before his mother takes him to a mall Santa (portrayed by Noah, who had taken his friend's shift). Meanwhile, Pino sneaks into their house, but when Sarah and Derek get home early (due to Noah's odd behavior), Pino flees. Sarah is visited by her friend Kim, Neith Hunter, and Derek sneaks outside and throws the present in a garbage while they talk. However, Kim's adopted son Lonnie opens the gift and finds roller skates in it. Lonnie, Conan Yuzna, then uses the skates, but they contain rockets that send him careening into trouble, leaving him hospitalized; the rockets cause him to lose control.
In a drunken rage, Joe Mickey Rooney begins beating Pino, accidentally killing him by knocking him down some stairs. Noah confronts Sarah at a parking garage and is revealed to be Sarah's old boyfriend and Derek's real father, and the two reconcile. At Sarah’s house, Derek’s babysitter Merideth Amy L. Taylor and her boyfriend Buck Eric Welch have sex when Joe has a horde of toys attack them. Sarah and Noah arrive and find a bloody Merideth, who tells them Buck is dead and that Joe has abducted Derek, taking him to the toy store. Noah tells Sarah about Joe's past, saying he was arrested years earlier for booby-trapping toys he gave to children after his pregnant wife died in a car crash. Sarah and Noah rush to the toy store. Joe attacks Noah with a remote control plane and an acid-squirting water pistol, knocking him out. Hearing the noise, Sarah goes downstairs, finds the toys and Joe reveals he is actually Pino, a robot. Pino explains to Sarah that Joe created him to replace his dead son and was continually broken and rebuilt by Joe in his drunken rages. Pino says he wants to kill Derek and replace him. Noah arrives and the couple destroy Pino. As Sarah, Derek, and Noah exit, the eyes of one of Joe's partially assembled robots spark ominously.
