The city of Monstropolis in the monster world is powered by energy from the screams of human children. At the Monsters, Inc. factory, skilled monsters employed as “scarers” venture into the human world to scare children and harvest their screams, through doors that activate portals to children’s bedroom closets. It is considered dangerous work, as human children are believed to be toxic. Energy production is falling because children are becoming less easily scared, and Monsters, Inc.’s chairman, Henry J. Waternoose, is determined to find a solution.
James P. “Sulley” Sullivan and his partner, Mike Wazowski, are the organization’s top employees, but their chief rival, Randall Boggs, is close behind. One day, Sulley discovers that Randall has left a door activated on the scare floor and a small girl has entered the factory. After several failed attempts to put her back, Randall sends the door back into the factory’s door vault and Sulley conceals her and takes her out of the factory. He interrupts Mike’s date with his girlfriend, Celia, at a sushi restaurant, and chaos erupts when the child is discovered. Sulley and Mike manage to escape with the child before the Child Detection Agency (CDA) quarantines the restaurant. They soon discover that she is not toxic after all; Sulley grows attached to her and calls her “Boo”, while Mike is just anxious to be rid of her.
The two smuggle her back into the factory disguised as a baby monster in an attempt to send her home. Randall discovers Boo and tries to kidnap her, but mistakenly kidnaps Mike instead. Nevertheless, he straps Mike to a large machine called “The Scream Extractor”, which he intends to use to revolutionize the scaring industry and solve the monster world’s energy problems by forcefully extracting screams from kidnapped human children. Before Randall can use the machine on Mike, Sulley disables the machine, frees Mike, and reports Randall to Waternoose. Waternoose initially displays anger at hearing of Randall’s actions, but instead exiles Mike and Sulley to the Himalayas after revealing he is the one pulling the strings. The two meet the Abominable Snowman, who tells them about a nearby village, which Sulley realizes he can use to return to the factory. Sulley prepares to return, but Mike refuses to go with him.
Meanwhile, Randall is preparing to use the Scream Extractor on Boo, but Sulley intervenes, destroying the machine and saving Boo. Randall and Sulley battle, and after Mike returns and helps Sulley overpower Randall, the two reconcile, take Boo, and flee.
Randall pursues them to the door vault, and a wild chase ensues among the millions of doors as they move in and out of the storage vault on rails to the factory floor. Boo’s laughter causes all the doors in the vault to activate at once, allowing the monsters to freely pass in and out of the human world. Randall attempts to kill Sulley, but Boo overcomes her fear of the former and attacks him, enabling Sulley to catch him. Sulley and Mike then trap Randall in the human world, where two residents at a trailer park mistake him for an alligator and beat him with a shovel.
Sulley and Mike take Boo and her door to the training room. Waternoose follows them and demands Sulley to surrender Boo to him. Sulley inadvertently tricks Waternoose into shouting aloud his plan of abducting children; the confession is recorded by Mike on a videotape, who then plays the recording to the CDA; Waternoose is immediately arrested. Roz appears, revealing herself to be the CDA’s director who has worked undercover for nearly three years to expose Waternoose and Randall’s crimes. She thanks Mike and Sulley for revealing his true colors, but orders the CDA to destroy Boo’s door; they do so and Sulley is left saddened by Boo’s departure.
With the factory temporarily shut down, Sulley is named the new CEO of Monsters, Inc. Under his leadership, the energy crisis is solved by harvesting children’s laughter instead of screams, as laughter has been found to be ten times more potent. Mike takes Sulley aside some time later, revealing he has rebuilt Boo’s door. It needs one final piece, which Sulley took as a memento, in order to work. Sulley puts the door chip into place, enters, and joyfully reunites with Boo.