The lights come up on Steve, alone and holding a Twinkie with a candle. Today is his nineteenth birthday. Mom and Dad called earlier to send their best. Like every year, Grandma has sent a card with a dollar enclosed. Also like every other year, his brother, Ben, has done nothing. Steve wishes that Ben would remember his special day just once. Suddenly, voices echo through his room, suggesting that it might be possible for wishes to come true. His bed magically becomes a time machine ("What If Wishes Came True?"). Steve travels back to when he was six years old. He remembers that this was the start of his complicated relationship with Ben. Ben hated everything about Steve, and Steve wanted nothing more than to be loved by his older brother. This was a difficult time for Steve, and he never would have made it to the age of seven, if it hadn't been for the Velveteen Rabbit.

The scene transforms to Steve's childhood bedroom, filled with toys, including the Velveteen Rabbit, Motor Boat and Rocking Horse. Ben, age twelve, zooms through on his skateboard. It is Steve's sixth birthday, and he just wants his older brother to wish him a happy birthday. Ben, however, just wants to take Steve's dollar from grandma. They fight; Ben threatens to beat up Steve, and Steve runs to find his mother for protection. When the boys leave, the toys come to life. The Rocking Horse and Motor Boat argue about who is actually Steve's favorite toy. The Rocking Horse has been around for the longest and feels superior. The Motor Boat is new – and a braggart. Velveteen, on the other hand, is upset. He's been around for a whole year, and Steve hasn't played with him once. Steve takes Motor Boat out to play, leaving the other toys behind. Velveteen feels sad ("Velveteen's Lament").

Ben tells Steve that it's time for bed, but Steve is not sleepy. He would much rather have Ben teach him a trick on his skateboard. Ben refuses because Steve isn't cool enough to play with him. He tells Steve to play with the Velveteen Rabbit, instead. On his way out, Ben scares Steve by insinuating that there are crocodiles underneath his bed. Steve runs out of the room, afraid. The toys come back to life. Motor Boat complains about the way that Steve played with her, but Velveteen says that she should be grateful that she got played with at all. Motor Boat explains that the reason that she gets played with, and Velveteen doesn't – she can do cool things, like toot her own horn, but Velveteen doesn't do anything. If Velveteen wants to be played with, he needs to adjust to the times – kids want toys with batteries, not toys that are just good for hugging ("Welcome to the 21st Century"). Before Motor Boat can finish showing off her battery-powered tricks, her batteries die. Rocking Boat explains that fancy toys like that lose their appeal when their batteries die; Velveteen doesn't have batteries inside, so he must find what special thing he does have.

Steve and Ben enter fighting. Ben desperately tries to get his younger brother to go to bed. Mom and Dad went out and left Ben in charge, but Steve won't listen. The phone rings, and Ben runs to get it while Steve plays with the Motor Boat. Discovering that the batteries are dead, he puts in new ones and takes the Motor Boat to blow her horn and continue pestering his older brother. Velveteen is confused. The Rocking Horse said that once the batteries ran out, Steve would tire of Motor Boat. The Rocking Horse tells Velveteen that it isn't all that simple – children are very unpredictable. However, Velveteen and Rocking Horse are different from toys like Motor Boat. They can become real to a child in a way other toys can't. Velveteen asks how he can make this happen, but Rocking Horse explains that he can't force it. He just has to be there and wait for something magical to happen. Velveteen will become real when he is loved – Rocking Horse knows, because it happened to her ("Toy Magic").

Steve jumps into bed and falls asleep. Motor Boat complains how Steve put her in water and got the batteries all wet. Velveteen asks the boat if she loves the boy, but it's clear that she doesn't. Steve wakes up, afraid, and he calls for his brother. Ben begrudgingly gets off of the phone with his girlfriend and comes in. Not only did Steve hear something, he thinks that something moved while he was asleep. Ben doesn't take him seriously, telling him to hug the Velveteen Rabbit and go back to sleep. Steve is still scared and asks for a story. Ben agrees but makes Steve give him the dollar in exchange. The story is about two brothers who are out at sea on a raft that gets attacked by killer sharks. Unfortunately, the story dissolves into another fight, as Ben gets bored ("Big Brothers"). Ben finally goes off to call his girlfriend back, leaving Steve alone again.

Steve asks the Motor Boat to play with him but accidentally breaks her switch. He looks over to the Rocking Horse and realizes that he is too big to ride him. Finally, he comes to Velveteen and asks him to be his friend. This is the chance for which Velveteen has been waiting. Now that he is needed and loved, Velveteen springs to life before Steve's very eyes.

The scene shifts to the outdoors as Steve decides what he and Velveteen should do. Imagination takes them everywhere. They play baseball and go to the United Nations in New York. They visit the Queen of England. They even go into outer space and look at all of the stars. When they are coming back to Earth, they get to see Grandma's farm ("Around the World"). Ben finds his brother having a wonderful time with Velveteen and is a bit jealous. Now that he has Velveteen, Steve doesn't appear to be interested in pestering his older brother. Ben tells Steve to set the table for dinner, but Steve and Velveteen are off to Hollywood, where they have their own T.V. spy show ("Super Spies"). When it's time for Steve to eat, he leaves Velveteen alone in the yard. 

A rabbit hops out from the underbrush. Velveteen has never seen a real rabbit before. His fur is all shiny and his seams don't appear to show. This confuses Velveteen, but it isn't until he dances with the Wild Rabbit that he realizes just how different the two of them are. The Wild Rabbit laughs at poor Velveteen, telling the toy that he'll never be real. She then hops off, leaving the poor toy all alone to think about his situation. After dinner, Steve returns with a flashlight and blanket. He's alone and cold, sneezing all the way. He's scared, but when he finds Velveteen, he wraps up the toy and takes him home. Velveteen thought that Steve may have forgotten about him, but the boy assures him that they are true friends. Velveteen suggests that they build a secret fort, but Steve doesn't feel very well and needs to sleep.

Velveteen tells the other toys just how happy he is, now that he really matters to someone. But soon, Steve is crying out in pain. The boy is burning up with a fever, and there's nothing that the toys can do to help him. Morning arrives, and Ben comes to fetch his younger brother for breakfast. Seeing that he has a fever, Ben frantically calls to their mother. The next day, the toys are alone. Even the Motor Boat is more quiet than usual. Steve is in the hospital with scarlet fever. Velveteen is especially upset. A few days later, Ben sneaks into Steve's hospital room. He isn't supposed to be there but he wants to see his brother. Steve is very weak and asks Ben about Velveteen. Ben assures Steve that Velveteen misses him, saying that he has a bunch of other stuff to tell him but that he can't remember any of it. It's obvious that Ben is concerned about his little brother but he just has a hard time expressing himself.


The next day, Ben goes into Steve's room. He actually talks to the toys, telling them that Steve is coming home tomorrow. Ben admits that you don't know just how much you care about somebody until you're afraid that you might lose him. He finds it ridiculous, talking with the toys but he needs to tell someone how he feels. He then places them in garbage sacks and removes them from the room – the doctor has ordered them to be discarded. It is important that all of the germs in Steve's room be killed before he gets home. 

The next day, Steve runs into the empty room, and Ben follows. Steve sees that his toys are gone. Even though Ben clearly explains what has happened, Steve is distraught. Ben tells him that they will get him new toys, but Steve doesn't want new ones! He wants his old toys – especially the Velveteen Rabbit. Ben sees how upset his younger brother is and even offers to play with him, but Steve doesn't care – he wants to be left alone in his room. Ben leaves him, but a few moments later, the skateboard comes rolling in by itself and stops in front of Steve, followed by Ben. The two boys run off together and play.

Outdoors in the trash, the toys bemoan their wretched situation. Velveteen asks the Rocking Horse what is going to happen to them. Unfortunately, she doesn't have any answers. The Motor Boat pretends to go off looking for help but is clearly just interested in saving herself ("Welcome to the 21st Century – Reprise"). Suddenly, there is a fire! What can they do!? They are toys that can't move! Velveteen, not knowing what else to do, chants, "I'm real!" over and over. Suddenly, his legs start to move and he pulls the Rocking Horse out of the trash before putting out the fire. The two animals are now real. Toy magic is real – for being real is learning how to love someone. The Wild Rabbit enters and notices the change that has come over Velveteen and the Rocking Horse ("Sparkle in His Eyes"). Meanwhile, Ben and Steve bond, as Ben teaches Steve to skateboard. The Wild Rabbit asks if Ben is a real boy, and Velveteen says that he is. He knows this for certain, because Ben is loved. The animals exit happily, knowing that the two brothers have grown closer.

The scene transforms back to nineteen-year-old Steve with his Twinkie ("What If Wishes Came True? – Reprise"). Steve realizes that it is amazing how there are certain people and certain things that you never really forget. They influence you and stay with you more than you ever knew possible. Suddenly, all of the other actors burst onto the stage as grownups. It's a surprise birthday party for Steve. The phone rings, and... it's Ben. He didn't forget Steve's birthday, after all ("Sparkle in My Eyes – Reprise").