Sherman Klump is working on a new miracle formula– this time, the fountain of youth. He is also preparing to marry a fellow scientist and girlfriend, Denise Gaines (Janet Jackson). Unfortunately, he has started suffering from personality lapses that are threatening to alienate his bride-to-be: against his will, he acts like the obnoxious Buddy Love of the first film. After a particularly unpleasant incident, Sherman goes to his lab to analyze his DNA and locates Buddy Love's DNA in an abnormal gene. He decides to use Denise's genetic research methods to isolate the gene and permanently extract Buddy Love's DNA from his own. His assistant, Jason, tries to stop him, warning him that he might damage his health or even lose his intelligence. Sherman disregards the warning and, alone in his lab late at night, extracts Buddy's DNA.
The orphaned DNA, a glowing blob of jelly, combines with a hair from a basset hound named Buster and grows spontaneously into an adult man, Buddy Love—now a fully autonomous being. Thanks to his doggy heritage, however, this Buddy Love has a tendency to chase cats and cars. Sherman, meanwhile, has inflicted so much genetic damage on himself by removing Buddy that his brain cells begin dying at an exponential rate.
Meanwhile Cleetus, who has now retired from his job in the construction industry, takes a swig of Sherman's new formula, which Sherman hid in the garage earlier, and becomes a man in his late 20s, goes to a club and ends up in a fight with an older man named Willie. Buddy, who had an unsuccessful deal with Leanne Gillford, notices this fight when Cleetus turns back into his old self.
Buddy breaks into the Klump's house and steals some of Sherman's youth formula, planning to sell it to the highest bidder, then adds a household chemical to the remainder of the mixture. But Granny catches him, and thinks he is the stripper that was ordered for Denise's bachelorette party. Granny then strips and tongue-kisses Buddy. When Sherman administers the adulterated potion to a hamster in front of a large audience, the hamster, Petey, grows to enormous size. The Dean (Miller) hides from Petey under a fur coat, which the hamster sees as a female hamster named Molly, who already escaped the potion. Petey performs a lewd act (offscreen) on the Dean. After the fiasco, the deeply traumatized Dean fires Sherman. However, this is the least of Sherman's problems; his brain damage is now reaching a critical level. With the help of his loyal lab assistant, Jason, he devises a strategy to restore his mind. He plans to reintegrate Buddy into his DNA by reverting him back to the jelly-like matter he used to be, then sucking him up through a straw.
Sherman concocts a new, stronger youth formula when he is interrupted by Dean Richmond, demanding to know what Sherman's playing at. Richmond explains Buddy Love is selling the youth formula to a rival company, and believes Sherman to be in on it. Sherman gets a tennis ball, and heads with Dean Richmond to the office where Buddy is pitching the youth formula he stole; if he can revert Buddy to an infantile state and consume him, the return of Buddy's DNA to his own system will repair the damage that he originally caused. When Sherman arrives Buddy laughs, but Sherman then throws the tennis ball, and Buddy's dog genes compel him to give chase. Sherman has coated the ball with his new, super potent youth formula, and when Buddy catches the ball, he turns into a toddler. He runs off, then melts into a gelatinous blob that continues fleeing. However, Buddy suffers many injuries while in his blob form which soon kills him. He is run over by a car, thrown into the air making a hard landing, and is trampled in a large crowd of people. Buddy, in critical condition, before taking his last breath, he tells Sherman "Let's see how long you last without me". He dies and evaporates into a public coin fountain. But unfortunately, for Sherman, he can no longer get back inside of him.
Denise and Cletus arrive, and see Sherman and Richmond. Sherman, before his brain becomes seriously damaged, sadly tells Denise, whom he no longer recognizes, that he no smart, never, no more. Denise starts crying, and one of her tears lands on Buddy's DNA blob, causing it to trickle into the fountain. As his companions begin to usher him away, Denise promising to take care of him, Sherman turns and mumbles something about "pretty water". They see the fountain's water glowing a bright neon blue. Buddy is dead but his DNA is still alive in the water. She and Cletus force Sherman to drink the water before the DNA disperses, and he rapidly regains his mental faculties. In the last scene, Sherman and Denise get married.