In a far-off world, a young man with white hair is fighting an epic battle to rescue a girl. This epic battle scene concludes with the title of a video game called Verum Rex and some robot action figures called Gigas. It turns out it was a commercial being watched by a toy named Rex and his friend Hamm. Sora, Donald, and Goofy emerge from underneath a bed to find that they have been turned into toys, making the entire world seem gigantic. They run into some Heartless, which they promptly defeat. After the fight, they meet Rex and Hamm along with their friends Buzz Lightyear and Woody. Rex and Hamm confuse Sora with the white-haired protagonist from the Verum Rex game, whose name is Yozora. Woody gladly introduces himself to them, but Buzz is a bit more suspicious. They tell Sora and friends that their friends disappeared, and around the same time the Heartless appeared. Further, their owner, Andy, and his family have vanished as well. Buzz tells them that the Heartless were accompanied by a figure in a black coat. Some of the other toys, the Toy Soldiers, report that the figure was last spotted in a toy store called Galaxy Toys, so they head there to find him.
Inside Galaxy Toys, the group encounters the black-cloaked figure, who turns out to be Young Xehanort. He summons some Heartless which proceed to climb into some nearby Gigas and pilot them. As the Gigas fight Sora, Young Xehanort explains that he came to this world to observe how hearts connect to one another, which can help the Organization retrieve a Seeker of Darkness they are missing. To test the connection of these hearts, he created an identical copy of the world and put Woody, Buzz, and their friends in it. After Young Xehanort leaves, Sora jumps into a Gigas himself and pilots it to defeat the Heartless-controlled ones. Buzz dismisses the idea that the world was split in two, saying that Sora simply believes it because he is a video game character from a fictional world. Woody reminds Buzz that he himself once believed some outlandish things, back when he thought he was a real Space Ranger. Their argument is interrupted by the soldiers' Sergeant reporting that Rex has been kidnapped, so they decide to put their differences aside to find him first.
On the second floor, the group is attacked by a group of large, Kaiju-esque toys being piloted by Heartless. They manage to defeat most of them, but one catches them off guard. Suddenly, Rex, who is riding on a toy plane, slams into it and knocks it over, knocking the Heartless out of the toy. After Sora finishes it off, the Sergeant reappears and reports that Hamm was found in the "Babies and Toddlers" section of the store, but his soldiers were cut off by some strange music. Rex stays behind while they go to that part of the store. Once there, they find the source of the music, where they rescue the lost soldier.
The group manages to find Hamm inside a nearby dollhouse, but they are attacked by a Heartless-possessed doll called Angelic Amber. After defeating it, they spot a UFO, which they follow (sans Hamm). They destroy the UFO and rescue the three Little Green Men. Afterwards, they go to leave the store, but they find that Rex has vanished again. Hamm tells them that he went to the video games section, so they head there. They find Rex, but Young Xehanort reappears and summons a Heartless, which possesses Buzz. He tries to shoot Woody, only to be blocked by Goofy. Young Xehanort explains that the toys grew hearts due to the bond they shared with their owners. He intends to test those bonds by using Sora to sow suspicion and distrust, turning them against each other. Sora tries to stop Buzz, but Young Xehanort grabs him and throws him into the Verum Rex game. Sora fights his way out of the game, but Buzz is nowhere to be seen. Woody explains that he disappeared through a corridor of darkness. The Toy Soldiers report that they found one in the Kid Korral section, so they go there to search for it.
The group finds the corridor of darkness in the vent above the Kid Korral. They step through it and find themselves steeped in darkness, with Buzz trapped by Young Xehanort. He observes that Buzz's separation from Andy produced incredible darkness, but Sora insists that the connections between Buzz and Andy's hearts will not fade simply because they are apart. Young Xehanort states that the power of loneliness is greater than the power of friendship, but Woody says that Xehanort probably just thinks so because no one ever loved him. The power of Woody and Sora's hearts releases Buzz from the darkness, and Woody uses his string as a grappling hook to save him. Woody tells Young Xehanort that he is "hollower than any toy," but he shrugs it off. His experiment was a success; the connections of Woody and Buzz's hearts prove that any object or vessel can contain a heart. Because of that, the Organization can use any vessel they want and place a heart in it. With this knowledge, Young Xehanort summons a powerful Heartless called the King of Toys and disappears.
The group fights and destroys the King of Toys and then returns to the bottom floor of the store. Despite all their efforts, they were unable to get back to the real world. Buzz apologizes for not trusting them, and they say that if they follow their hearts, they will be able to find Andy again someday. Unfortunately, Sora, Donald, and Goofy still have much work to do, so they leave their new friends to continue their journey.
Back on board the Gummi Ship, Sora tries to call Ienzo to ask him how progress is going with the search for Roxas, but Mickey calls him first. Sora asks him and Riku how they could find a body for Roxas. Riku tells Sora that the replicas which were constructed by the original Organization XIII could potentially make for good vessels. He realizes that Sora forgot the events of Castle Oblivion, so he explains the replica program to him. He tells Sora that replicas change form to match the heart that controls them, so if Roxas's heart inhabited one, it would look like him. Sora tells Mickey and Riku about their earlier encounters with the Organization and Maleficent, and Mickey tells him about Terra and his possession by Xehanort before hanging up. Afterwards, they decide to visit Ansem the Wise's castle to see if his apprentices, especially Ienzo, know anything more about the replicas...
