While Polly is singing "Jingle Bells" on Shipwreck's shoulder, Shipwreck grabs the parrot's beak and tells him to be quiet or there is a feather duster in his future. After Dusty tries to lighten the mood in the A.W.E. Striker, Cover Girl happily chimes in that the Joes have collected enough toys for their toy drive to beat last year's contribution to a local children's hospital.
Wild Weasel attacks the Joes in a Rattler and Cover Girl drives onto a road surrounded by rocky cliffs while avoiding the Rattler's shots. The Joes fire back at the Cobra plane, but Cover Girl is forced to squeal to a stop in order to avoid one of the shots. And the moment she stops, Firefly appears from behind a door built in the rock quarry and drops toys into the Joes' G.I. Joe Happy Holiday Wagon. Wild Weasel receives Firefly's signal indicating his part of the mission has been accomplished and, after radioing Cobra headquarters that the mission has ended, flies a loop in the air and zooms away. Unsure why the Cobra plane left the Joes when they could have been pinned down until next Christmas, Cover Girl offers an apathetic response and tells the others, "Let's not look a gift horse in the mouth." And inside the Joes' toy trailer, a rocking horse's eyes begin to blink.
Shipwreck, Dusty and Cover Girl arrive at Joe headquarters under gentle snowfall and Blowtorch removes the rocking horse from the trailer and tells Shipwreck and Roadblock that he always wanted the toy since he has a boy. Cover Girl walks with Duke in the snow and explains that if Cobra launched a full-scale assault, the base could be vulnerable since most of the Joes are on holiday leave. Flipping a switch, Duke tells Cover Girl that the base is safe as long as they have the automatic defense grid activated, and a fence composed of bright red lasers surrounds the base.
The Joes sit down for a Christmas dinner prepared by Roadblock. However, Mutt excuses himself from the table after Junkyard receives a turkey leg from Duke, but Junkyard drops his meal and follows Mutt out of the room. Tripwire asks Duke what's wrong with Mutt, and Duke can only guess "holiday blues." While walking with Junkyard, Mutt explains to his best friend that he always finds himself slightly depressed during the winter holidays because his parents always made a big fuss. As a result, Mutt was never able to experience the little things that make the holidays memorable and enjoyable, like trimming the tree, hanging his own stocking by the fireplace or wrapping presents.
But Mutt's thoughts are cut short as he hears a noise in the Joes' toy depot. The rocking horse moves forward and several miniature Cobra agents and Major Bludd are ejected from the saddle of the horse and parachute to the ground. Miniature S.N.A.K.E.s burst out of teddy bears and Rattlers, F.A.N.G.s and C.L.A.W.s fly out of drums as Mutt sounds the alarm before falling to the floor unconscious due to the sleeping gas from Cobra's aerial weapons.
As the Joes rush outside, the Baroness flies to the control panel for the defense grid and destroys it with a blast from her Rattler. With the defense grid down, Firefly runs toward the wall of the Joes' headquarters, scales it to the top and shoots the Cobra forces who are approaching the Joes with a beam that enlarges the Cobra personnel and vehicles to full-size. Roadblock shoots at the wall under Firefly and causes the Cobra saboteur to drop the gun. The Joes are surrounded and Cobra Commander walks out of the toy bunker and tells the Joes, "Seasons greetings." And he then laughs with an insane, raspy laugh.
Cobra tells Duke, who is addressed as Sergeant "Duke" Hauser, that the Joes' base is now under Cobra's control, but Cover Girl insults Cobra Commander and yells "Yo Joe!" The other Joes then open fire and launch their own offensive. Cover Girl's gun is shot away and is knocked out from behind.
However, Duke smashes the butt of his rifle into a S.N.A.K.E. robot's visor, turns his gun around and fires a shot into its head, causing the robot to explode. Upon Cobra Commander's order, the Baroness fires a gas bomb at the Joes. Duke, Tripwire, Blowtorch, Polly, Shipwreck, and Roadblock fall to the ground unconscious. Cobra Commander then orders Major Bludd to prepare the Joes' weapons.
When the Joes are awake they are led to Cobra Commander and surrounded by more S.N.A.K.E. robots. Cover Girl demands to know what has happened to Duke and Cobra Commander chuckles as she explains that Duke has had a change of heart. "And I'm the queen of England," Wild Bill sneers. Roadblock taunts Destro by asking his "pop gun" was broken, but Destro controls his rage and explains that the pop gun is a molecular reducer/enlarger and represents a decade of research. The Baroness places her hands on his shoulders and tells him that the weapon has accomplished its task and has allowed Cobra the chance to use the Joes' vehicles to attack Keystone City, a plan that will convince the US government that the Joes have defected.
Turning on a monitor, Cobra Commander then shows the Joes a television broadcast of Duke telling the citizens of Keystone City that they are now under the martial law of G.I. Joe and that they will start serving the Joes. Cover Girl asks the monstrous Cobra Commander what he has done to Duke, but then Duke enters the room, calls Cobra Commander "master," and rips off his mask to reveal himself as Zartan. Even with handcuffs on their wrists, the Joes run forward to Cobra Commander in attempt to stop him, but the S.N.A.K.E.s block their approach and Cobra Commander orders the Joes to be taken to a cold storage room since he wants to keep in the spirit of the season.
The Joes hang on meat hooks suspended over the ground and before Major Bludd closes the door he tells the Joes to "keep cool." After the door is closed, Tripwire decides that he hates puns and Shipwreck tells Cover Girl that he could have a meaningful relationship with the piece of meat next to him. "Is your brain frostbitten or what!?" Cover Girl asks. "Come on," Shipwreck says. "You've got no imagination."
Cobra Commander learns that Major Bludd's men will be able to fly the Skystrikers in an hour and then visits the Joes. The Baroness tells Cobra Commander that gloating before the Joes is pointless, and before he enters the cold room, Shipwreck clings to the piece of meat with his legs in order to lift his handcuffs over the meathook. And just as Cobra Commander enters the room, Shipwreck grabs the meathook and listens to Cobra's leader babble about their gloomy faces on a holiday morning and explains that he has even brought the Joes a gift, the key to their handcuffs. And as soon as Cobra Commander leaves, Shipwreck hops down and grabs the key.
Destro welds the gun back together and the Joes blow the door away to his room, rush inside and shoot down the S.N.A.K.E.s. Tripwire checks the monitor to see if Cobra has left and finds out that the Joes are too late. However, Cover Girl notes that the Joes have Destro. But Destro picks up the molecular reducer/enlarger and asks the Joes, "Or do I have you?" And he fires several shots at the Joes. Equipment and doors shrink and Destro laughs as he threatens to reduce the Joes to sub-atomic nothingness.
But Polly attacks Destro and distracts him long enough for the Joes to smother him in a tackle but not before Destro hits the parrot. Slowly, the Joes get off Destro, and as Roadblock and Blowtorch twist Destro's arms behind his back, Mutt and Junkyard, who are both growling, let go of Destro's feet. Cover Girl picks up Destro's gun, shakes it and hears something loose rattling inside.
Wild Bill complains that not only has Cobra taken the Joe vehicles but they have been given flies as well. Before Wild Bill can swat the fly, Shipwreck grabs one of Wild Bill's hands and tells him that the fly is actually Polly, who lands on the tip of Shipwreck's nose and cries for help. Tripwire is given the gun by Cover Girl and after Wild Bill stops him from shooting at Shipwreck, Polly flies in the air and is hit with a beam from the gun after Tripwire finds the enlarger switch. In his normal size, Polly falls into Shipwreck's hands and he places his pet parrot on a miniature table and adds that he won't miss his pal very much during the battle with Cobra. As soon as the Joes leave the room, Polly begins to grow larger.
The Joes board a C.L.A.W., a Trubble Bubble, a H.I.S.S., a Stinger (with an A.S.P. in tow), a F.A.N.G. and a Rattler. Meanwhile, Polly awakens and a pair of truck drivers are forced to veer off the road as the Cobra-controlled G.I. Joe convoy, which includes a V.A.M.P. Mark II, Mauler M.B.T., A.W.E. Striker, Skystriker, Silver Mirage motorcycle, Sky Hawk and a R.A.M., rolls toward Keystone City. And one stunned truck driver tells the other that he thought G.I. Joe was supposed to be on their side. Inside a Skystriker, a handcuffed Duke tells Cobra Commander that he will not win because the people will fight back, but Cobra Commander couldn't care less and replies that that the people will just die.
Cobra Commander, piloting a Skystriker, opens fire on the civilians, causing a man and his son to dive for cover in the door of a shop. Zartan is riding a Silver Mirage, when suddenly the road explodes in front of him, knocking him off the bike. The attack came from the Joes, who are piloting the vehicles Cobra left behind.
Meanwhile, back at the base, Polly has continued to grow. Her head bursts through the roof, and she takes to the air. In the city, Blowtorch shoots down Major Bludd, and Roadblock shoots two Cobra Troopers who are in a stolen V.A.M.P. Baroness uses the A.W.E. Striker's gun to blast a Stinger, and Wild Bill in a F.A.N.G. manages to out-pilot Wild Weasel in the Dragonfly. A Trubble Bubble piloted by Shipwreck fires at the Baroness, and Cover Girl takes out the tanks using a Cobra Rattler.
Cobra Commander fires the Skystriker's missiles, disabling the Rattler. Cover Girl is falling, but is caught safely by the now-giant Polly. The enormous bird sets the Rattler down, and swoops at the Skystriker. Cobra Commander manages to hit the ejector seat, with Duke holding onto him. After a struggle, he flips the Joe leader over his shoulder and toward the ground. Polly catches Duke and brings him to the other Joes.
Glad to have won the day, Cover Girl kisses Duke, Mutt hugs Junkyard, and Shipwreck covers his ears to block out the squawking of the plus-sized Polly, muttering "Bah humbug..." in response to Polly's "Merry Christmas!" as he does.