It’s funny how many jokes I get now that I’m older that I didn’t get when I was a kid, including this one. Someone else on another forum mentioned that Potato Head crosses himself (like a Catholic priest) when they’re waiting to find out what Andy’s big new toy is.
I had no idea what Mr. Potato Head was doing either when I was little, but now it’s like… wow. 
If you think about it some of the jokes in the 1st Toy Story are a bit much compared to all their recent films.
Lol, when I was a kid I had no idea what it meant. All I knew was that my parents were laughing for a minute when they saw that. 
I love how I never got the joke till I hit my early teens. It’s the same thing with the other scenes in the movies like when:
[spoil]-Woody and Bo were flirting in their first scene together.
-When Woody says to Buzz "The word I’m searching for, I can’t say because there are preschool toys present.
-Hamm and Mr. Potato Head playing strip battleship.
-Buzz’s wings popping out when Jessie did her trick.
-Mr and Mrs Potato Head having some “fun” when Buster was introduced in TS2.[/spoil]
That’s one thing you can count from Pixar, it’s their little adult jokes that they put in there. Makes their movies even more entertaining than what they already are. 
I was always too young to figure out what Potato Head was doing. When I watched Toy Story a couple months ago I saw him do that and I laughed.
That’s the best thing about watching, something new every time. Like when the army men anounce Mrs. Potato head on Christmas, Mr. Spell reads “hubba hubba”. I hope they keep these kind of jokes in TS3
I love how much ParentalBonus jokes PIXAR puts in each one of their films. I think the first adult joke I got from Toy Story was when after Woody berates Buzz’s laser, Mr Potato Head says “Laser Envy.” Classic!
But what I find even more funny is how many possible double entendres can be interpreted from the film. For instance take Woody’s line in TS3:
Hamm: “To reset your Buzz Lightyear, insert paperclip…”
Woody: “REX! Use your finger!”
Very subtle indeed.