Heres the story *Thanks To ANSWERS.COM:According to the terms of Pixar's original deal with Disney, all characters created by Pixar for their films were owned by Disney. Furthermore, Disney retained the rights to make sequels to any Pixar film, regardless of whether Pixar chose to work on the films or not. However, there had been a gentlemen's agreement between Disney and Pixar that Disney would not go ahead with sequels to films without Pixar's involvement. But in 2004, when the contentious negotiations between the two companies made it look like a split was likely, Disney Chairman Michael Eisner put in motion plans to produce Toy Story 3 at a new Disney studio, Circle 7 Animation. A basic plot was hashed out and pre-production was underway. This turn of events was not greeted with enthusiasm by all, with Pixar regular John Ratzenberger going so far as to say he would not be involved without Pixar. Others, such as Tim Allen, the voice of Buzz Lightyear, indicated a willingness to return even if Pixar was not on board.
All this changed once Eisner stepped down as head of Disney in the Fall of 2005. Negotiations between the two companies resumed and a deal for Disney to purchase Pixar was reached fairly quickly and announced in January 2006. Part of the deal was that John Lasseter and Ed Catmull of Pixar would take over control of Disney Animation. One of Lasseter's first moves was to end production on Toy Story 3, and shut down Circle 7.
In February 2006, Disney CEO Robert Iger confirmed that Disney was in the process of transferring the production to Pixar, during Disney's 2006 first-quarter earnings conference call.
On February 8, 2007, Ed Catmull announced that Toy Story 3 was in production for a 2009 release, with Toy Story 2 co-director Lee Unkrich as the sole director of the film and Michael Arndt, whose screenplay for Little Miss Sunshine won an Oscar, writing the script. A week later, in an interview with Entertainment Weekly, director Lee Unkrich corrected the release date as being 2010, not 2009.
The plot for the aborted Circle 7 version of the film focused on a recall of Buzz Lightyear toys, which includes Andy's. This led to a group of toys venturing to Taiwan to rescue Buzz, who has been malfunctioning. As previously indicated, this version has now been scrapped.
There are hints as to what the new plot will be, although they remain unconfirmed. In the bonus material of the first two films' "Ultimate Toy Box" DVD set, Lassetter mentioned that an intended story line for Toy Story 3 was to follow Andy's toys after Andy had grown up and abandoned them. Buzz, Woody and the rest of Andy's old toys would end up in an orphanage at the conclusion of the story, where the constant arrival of new children would mean that they would never be outgrown. This idea originated in an early draft of the original Toy Story, where Tinny (from Tin Toy) and a ventriloquist's dummy are hauled away by a junk man and are left at a preschool.