Lloyd Christmas and Harry Dunne are two kindly but dimwitted best friends living in Providence, Rhode Island. When Lloyd falls in love with a woman he is driving to the airport, he retrieves a briefcase she leaves at an airport. Unaware that the briefcase contains ransom money for her kidnapped husband, Lloyd tries to return it to her before the kidnappers can get it. However, he soon finds out the hard way, when they meet again that she is way out of his league.
In 1986, Harry Dunne (Derek Richardson (actor) finally gets his chance to go to regular school. At the same time, Lloyd Christmas (Eric Christian Olsen) has been adopted and exchanged several times until he is finally accepted by the school janitor, Ray (Luis Guzmán). Harry bumps into Lloyd on the way to school, in search for a treasure his mother (Mimi Rogers) asked him to find, and as if it were destiny, the two instantly became the best of friends. Lloyd introduces Harry to his "friend", Turk (Elden Henson), the school bully whose main function in life appears to be making Lloyd's life miserable. After putting Lloyd in a trash can, he hoists the two friends up a flagpole.
Twenty years after the events of the first film, Lloyd Christmas has all this time been committed at Baldy View Sanitarium, a mental institution, ever since his doomed romance with Mary Swanson. During a recent visit, Harry Dunne discovers that Lloyd pranked him into thinking he was traumatized the entire time. They head to their apartment, where Harry reveals he needs a donated kidney.