Top defense contractor GloboTech Industries acquires the Heartland Toy Company and as part of the move, Globotech CEO Gil Mars tells Heartland toy designers Larry Benson and Irwin Wayfair to develop actual live-action toys capable of "playing back". Mars selects Larry's action figures, the Commando Elite, for the project and Irwin's educational toys, the Gorgonites, for their enemies, with the toyline expected to hit the market in three months. Faced with such a tight deadline, Benson forgoes safety testing, then uses Irwin's password and chooses GloboTech's X1000 microprocessor to control the toys.
Teenager Alan Abernathy signs off for a shipment of the toys at his family's toy store without his father's consent. He and delivery driver Joe activate the leaders for each group – Archer for the Gorgonites and Chip Hazard for the Commando Elite. Alan's neighbor and love interest, Christy Fimple, buys Chip as a birthday present for her brother, Timmy. Alan returns home to discover Archer in his backpack; he realizes Archer is sentient, but in the meantime, the Commando Elite awaken and apparently destroy the Gorgonites in the toy store. Alan calls the company and files a complaint. Later, when Larry and Irwin listen to Alan's voice mail, Irwin is terrified to discover the X1000 was designed for smart munitions guidance; a Globotech engineer reveals the AI circuit is designed to learn over time, but mass production was scrapped due to issues with EMP shielding.
Meanwhile, Chip and his squad pursue Alan to his home and attempt to kill him and Archer in the kitchen. Unlike the Gorgonites, the Commando Elite do not understand they are just toys. Alan is attacked by Nick Nitro, whom he mortally wounds. His parents, Stuart and Irene, arrive at the kitchen, having been alerted by the sounds of the scuffle there. Alan attempts to explain what is going on, but with Archer not supporting his explanation, neither of his parents believe him. The next day, Alan and Archer find the rest of the Gorgonites in a dumpster at the store. At home, Alan learns that the primary goal of the Gorgonites is to seek their homeland Gorgon, which they mistakenly believe to be in Yosemite. Through tapping the Abernathys' phone line, the Commandos learn of Alan's interest in Christy and decide to take her hostage, immobilizing the Fimples' household to force Alan into surrendering the Gorgonites.
Alan and Archer sneak into the Fimples' house to save Christy, but run into her Gwendy dolls, whom Chip has engineered as auxiliary troops. The Gwendys quickly subdue Alan. Archer cuts Christy loose from her bonds, and together, they save Alan and destroy the Gwendys before escaping with the Commando Elite's kit-bashed vehicles in hot pursuit. However, they are all destroyed during the chase. The two teenagers and Archer return to Alan's house, only to find her family and his parents waiting for them, believing that Alan kidnapped Christy and immobilized the Fimples. This time, Stuart and Irene believe Alan and Christy's account of the Gorgonites and the Commando Elite (with help from the other Gorgonites to support their story), but Phil, Christy's father, and Marion, Christy's mother, refuse to listen to them about what happened. Irwin and Larry arrive and talk to Alan over his voicemail. At that moment, Chip, who survived the chase, attacks the house with a new force of Commando Elites, having hijacked Joe's shipment and equipped with more improvised vehicles and weapons, and a battle breaks out between the Commandos and the humans inside, cutting off the house's electricity supply.
Having been guided by Irwin's advice to create an EMP blast, Alan heads out to force an overload of the power lines. Christy, Irwin, and Larry head to the Fimples' house to turn on all electronic items inside and wedge the power transformers open for a larger surge. At Archer's command, the normally peaceful, heroic Gorgonites exit the house and fight back against the evil Commando Elite. Chip flies to the top of the powerline pole to stop Alan, where he briefly battles and defeats Archer, but finds himself thrust by Alan into the powerline, triggering the EMP blast, which kills Chip along with all of the remaining Commando Elites.
Mars arrives in his helicopter during the police and fire department cleanup the next day. He pays Joe, the Fimples, and the Abernathys for damages, as well as buying their silence from the media, and orders Larry and Irwin to prepare the Commando Elite for sale to rebels in South America. Among the craziness of the aftermath, Alan and Christy part on highly amicable terms, now having agreed to start a relationship with each other. Alan later discovers that the Gorgonites have screened themselves from the EMP blast by hiding underneath the Fimples' large satellite dish. The Abernathys bring the Gorgonites to Yosemite National Park, where Alan sends them out in a large toy boat from his father's store to find their island home of Gorgon.
Bruce Dern, along with George Kennedy, Ernest Borgnine, Jim Brown and Clint Walker, all cast members from The Dirty Dozen, provided voices for the Commando Elite (Dern replaced another Dirty Dozen star, Richard Jaeckel who died before shooting began). An uncredited Jim Cummings, along with This is Spinal Tap cast members Michael McKean, Harry Shearer and Christopher Guest, provided voices for the remaining Gorgonites. Sarah Michelle Gellar and Christina Ricci provided the voices for the transformed Gwendy dolls. Miller and Balaski, who were in the original versions of Piranha (1978) and The Howling (1981) (both directed by Dante), also acted in this film. Picardo's character, Ralph Quist, shares a surname with Eddie Quist, his character in The Howling.
On making the film, director Joe Dante recalled "Originally I was told to make an edgy picture for teenagers, but when the sponsor tie-ins came in the new mandate was to soften it up as a kiddie movie. Too late, as it turned out, and there are elements of both approaches in there. Just before release it was purged of a lot of action and explosions."
On the film's special effects, Dante stated "We were planning to use a lot of Stan Winston's puppets—he had made some very elaborate puppets that could do a lot of things. But in practice, we found it was much simpler and cheaper to let the CGI people do the work after we'd shot the scenes. So, I would say, it's one-third puppetry and the rest CGI in Small Soldiers, even though the original idea was to do mostly puppetry."
A soundtrack containing classic rock blended with hip hop was released on July 7, 1998 by DreamWorks Records. It peaked at 103 on the Billboard 200. The film score was composed and conducted by veteran composer Jerry Goldsmith. In addition, an action-adventure video game based on the film was developed by DreamWorks Interactive and released by Electronic Arts on September 30, 1998, along with a strategy game for the PC. Kenner Products (a subsidiary of Hasbro) produced a line of toys, which featured all of the Gorgonites and Commando Elite. Burger King teamed up with the film to promote their new product, the Rodeo Burger. They also created a line of Kids Meal toys tied to the film. They were met with some controversy after the film received a 'PG-13' rating from the MPAA. Burger King executives claimed this caught the company by surprise and they were led to believe the film would receive no higher than a 'PG' rating. While the pamphlet accompanying the toys included the disclaimer "While toys are suitable for children of all ages, the movie Small Soldiers may contain material that is inappropriate for younger children," some restaurants accepted an exchange for Mr. Potato Head toys.
Also, a special livery race car for Bobby Labonte was intended to be raced on July 4, 1998 at the Pepsi 400, which was to run on CBS prime time television. Because of the Florida wildfires, the car was instead raced three months later at the Winston 500 NASCAR race (October 11) on ESPN, where the car (a restrictor plate car) would have been used next.
On Rotten Tomatoes, Small Soldiers has a rating of 48%, based on 44 reviews, with an average rating of 6.2/10.
Critics praised the film's special effects, but criticized some of the darker tone of the film, which had been marketed to a young audience, in spite of obtaining a PG-13 rating.