Late one December night, Derek Quinn, William Thorne, finds a Christmas present on the porch. His father Tom opens the gift and discovers a musical orb shaped like Santa Claus; he activates it, and it tightens around him with retractable cords. As Tom struggles, he slips and falls onto a fireplace poker, and his impaled body is found by his wife, Sarah Quinn, Jane Higginson, moments later.
Two weeks later, Sarah takes Derek to a toy store owned by the elderly Joe Petto, Mickey Rooney, a World War II veteran, and his odd son Pino, Brian Bremer. Derek, who has been mute since his father’s death, rejects every toy they show him, and the couple leaves, while Joe yells at Pino about the shop’s struggles. Meanwhile, Noah Adams, Tracy Fraim, a recently discharged fellow soldier, has followed them and starts lurking around their world as he divests toys for inspection at home.
Noah runs into trouble when his landlord Harold, Gerry Black, confronts him over late rent. In exchange for a one-day extension, Noah gives Harold a “Larry the Larvae” toy, an exchange that ends fatally when the larva crawls into Harold’s mouth and bursts out an eye, killing him as he drives home.
The following day, Derek finds another gift on the porch, and Sarah takes him to a mall Santa (portrayed by Noah, who had taken his friend’s shift). Pino, meanwhile, sneaks into their house, but Sarah and Derek return early due to Noah’s odd behavior, and Pino flees. Sarah later agrees to let Derek open the previously delivered present, but he refuses.
Sarah is visited by her friend Kim, Neith Hunter, and Derek slips outside, discarding the gift in the trash. Kim’s adopted son Lonnie, Conan Yuzna, picks up the discarded package and discovers roller skates inside. While Lonnie tests the skates, rockets hidden within them cause him to lose control and he is struck by a car, leaving him hospitalized.
In a drunken rage, Joe beats Pino, unintentionally killing him by knocking him down stairs. Noah later confronts Sarah at a parking garage and reveals that he is her former lover and Derek’s biological father; the two reconcile in a moment of quiet understanding.
Back at Sarah’s house, Merideth, Amy L. Taylor, and her boyfriend Buck, Eric Welch, have sex as Joe’s horde of toys begin to attack. When Sarah and Noah arrive, they find Merideth bloody and Buck dead, and learn that Joe has abducted Derek and taken him to the toy store. Noah gives Sarah the brutal context of Joe’s past: years earlier, Joe was arrested for booby-trapping toys given to children after his pregnant wife died in a car crash.
The trio races to the toy store, where Joe attacks Noah with a remote-control plane and an acid-squirting water pistol, knocking him out. Hearing the commotion, Sarah descends to confront Joe, who is revealed to have a robotic exterior beneath his mask, eventually replaced by Pino’s face. Pino explains that Joe created him to replace his dead son but could never live up to his father’s expectations, and he longs for Sarah to be his mother—then violently assaults her as he frantically screams.
Sarah fights back, stabbing Pino in the head with a screwdriver and watching him malfunction. Grabbing a knife she had dropped, she halts Pino as he lunges at Derek, who is trapped in a large sack. Noah bursts in and fights Pino long enough for Sarah to strike him with an axe. Even in a barely functioning state, Pino pleads for mercy before Sarah delivers the final, crushing blow.
As they escape, the eerie spark of one of Joe’s partially assembled robots flickers in its eyes, hinting that the danger may not be completely over.
