From the mid-decade of the 2000s, work began on evolution of the hybrid system itself. One aspect of this evolution was the development of the plug-in hybrid vehicle, which allowed electrical charging from external power sources and had increased electric battery capacity, thus extending the electric vehicle cruising range.

In July 2007, Toyota created a plug-in hybrid vehicle based on the second-generation Prius that had twice the onboard battery capacity and could be charged from a 100-volt or 200-volt electric power source. Public road test data on this plug-in hybrid vehicle-which obtained approved status from Japan's Minister of Land, Infrastructure, Transport and Tourism were gathered in Japan, and it was also the subject of public road tests in the United States, France, and United Kingdom between 2007 and 2008. Toyota pressed forward with the development of the plug-in hybrid vehicle as one of the most promising responses to environmental and energy problems.

Meanwhile, in the mid-1990s, when the development of the first-generation Prius was reaching its peak, Toyota set about greatly reducing exhaust emissions and improving fuel efficiency for conventional internal combustion engines. One of the major results was the D-4 direct injection gasoline engine fitted in the Corona Premio sedan launched in 1996 in Japan. By adopting a lean combustion system, it improved torque output by approximately 10 percent and improved fuel efficiency by approximately 30 percent compared to regular engines with equivalent displacement.

Key to the commercialization of the D-4 was finding a way to handle nitrogen oxides (NOx), emissions of which increase under lean combustion. Toyota overcame this problem by developing a NOx storage-reduction three-way catalyst. As the use of the D-4 engine expanded, the catalyst also underwent rapid evolution, resulting in its receiving the 1999 Catalysis Society of Japan Award.

Among other engine improvements were the Variable Valve Timing-intelligent, an advanced version of the technology that optimally controls the timing of the opening and closing of the air intake valve, commercialized by Toyota in 1995, followed by the Valvematic continuously variable valve lift mechanism in 2007. An anti-idling device, which turns the engine off when the vehicle is for instance waiting at a traffic signal, was first adopted in 1981 in the Japan-market Starlet compact car, but in 2003 a fully automatic system was newly developed and fitted in the continuously variable transmission of the Japan-market Vitz compact car. Among its features was that it had a twin electric power source, with the lead battery joined by a newly developed lithium-ion battery to supplement the electric power supply while the engine is switched off or when it is restarted. The improvement in fuel efficiency achieved was approximately nine percent and the system won the Ministry of Economy, Trade and Industry's Energy Conservation Grand Prize in fiscal year 2003. In-house development of continuously variable transmissions, which improve fuel efficiency, was also advanced from the end of the 1990s, with the first adoption being in the family-targeted Opa passenger car launched in Japan in 2000.