John Bennett is a lonely boy who makes a wish on a shooting star for his teddy bear, Ted, to come to life and be his best friend forever. Miraculously, his wish comes true and Ted becomes a real teddy bear who can walk and talk like a human. The two grow up together and are inseparable as adults, with Ted becoming a foul-mouthed, hard-partying celebrity.
However, John's girlfriend, Lori, is growing tired of Ted's bad influence on John and insists that he grow up and start taking responsibility for their lives together. This leads to a conflict between John's loyalty to his childhood friend and his desire to make a life with Lori.
Meanwhile, a ruthless toy company executive is determined to capture Ted and study him as a scientific phenomenon. This sets off a series of events that force John and Ted to go on the run and fight for their lives, while also dealing with their complicated relationship.
Throughout the movie, John must choose between his nostalgic attachment to Ted and his love for Lori, all while trying to keep his friend safe and stay one step ahead of their enemies. In the end, John learns that true friendship and love require sacrifice and compromise, leading to a heartwarming resolution to his dilemma.