The movie opens with a documentary being made about the Jazz musician Fats Waller, starring Mike (Mos Def) with Jerry (Jack Black) and various other characters we meet throughout the movie. It's a crude, home-made movie, with Mr. Fletcher (Danny Glover) narrating, with sound clips of other people sharing their stories about his life.
We cut to a few weeks earlier, Mike and Jerry are spray painting a mural under an overpass advertising "Be Kind Rewind", a small general store that rents out VHS tapes for a dollar, which is owned by Mr. Fletcher. A police car pulls up and the cop in the driver's seat, who seems to be quite familiar with the two, threatens them with jail time if they don't stop tagging the wall. Jerry tries to play it off as it being the fault of some local kids, but the cops don't buy it and take off after giving them a warning.
The two then head back to the store, where three little boys are inside goofing around with Mike, Jerry, and Mr. Fletcher. They begin talking about Fats, whom Mr. Fletcher claims was born in the very building that their store is in, and loves sharing stories about Fats' life. Mike is mesmerized by the tales, and he obviously looks up to Fletcher. We're never quite clear on their relationship, but it seems Mr. Fletcher played the primary role in raising Mike, and told him stories about Fats Waller every night. Their attention turns to the three boys, who naturally don't really care about some old Jazz musician, and start busting rhymes in the store. The boys start rough housing and Jerry jumps in to play around and accidentally bumps a VHS rack, causing the tapes to fall on the floor. He apologizes profusely, and Mike suggests Jerry go back to his "microwave".
As it turns out, Jerry lives in a beat up trailer in a junkyard, which is right next to a power plant. When we see the inside of his trailer, we discover that it is lined with aluminum foil to protect him from the radiation. The next day, Mike and Mr. Fletcher come by and visit Jerry, who makes them wear pots and pans on their head to keep them from getting a tumor. They hang out and talk for a while, and when Mr. Fletcher and Mike return to the store, Mr. Fletcher informs him that he is going to be taking a "memorial" trip with some others to honor Fats' memory, and is leaving Mike in charge of the store. Mike is at loss for words, and is honored to do so, excited to have the opportunity to make Mr. Fletcher proud. Throughout the movie we discover that Mr. Fletcher is actually spying on a big-name rental store, taking notes on the employees, customers, and video selection. He has also been under pressure to vacate the building so it can be demolished and rebuilt into a more modern housing complex, and will be forced to do so if he does not bring the building up to code.
We next see Mr. Fletcher and Mike at the train station, trying to give Mike some last minute advice, but Mike keeps cutting him off and eventually Fletcher forgets what he was going to say. As he steps on the train and the door closes behind him, Mr. Fletcher suddenly remembers and writes with his finger on the foggy window "PEEK YRREJ TUO", which obviously read from reverse is "KEEP JERRY OUT", though it doesn't register that way to Mike. He is baffled by the senseless phrase and returns to the store, and has Jerry help figure out what he meant. They conclude that it must be some ancient proverb meaning "good luck" or something similar. Jerry then fills Mike in on a plan to sabotage the power plant by "throwing" a grappling hook at the generator, which Jerry claims is trying to control their minds. Mike is hesitant at first, but eventually caves in and they suit up in some disguises Jerry made, which look like they have oil stains on them.
We cut to Jerry and Mike climbing over the fence of the junk yard to the power plant using a ladder, when all of the sudden the two cops from earlier pull up. Jerry and Mike freeze, and we see that all those "stains" on the disguises turn out to be camouflage. With their outfits and make-up, Jerry and Mike perfectly match up with the fence and ladder and convincingly blend in to their surroundings. The officers then turn their attention to Jerry's trailer, who they think is inside sleeping, and begin banging on it and teasing him. They leave, and Mike sees the "Keep Out" sign on the fence, and it suddenly it occurs to him what "PEEK YRREJ TUO" means. He suddenly leaves Jerry behind after throwing the ladder over the fence. Jerry feels betrayed and opts to continue the mission anyway by throwing the grappling hook at the generator. Initially it does nothing but bounce off, but suddenly Jerry gets electrocuted and we see him get fried for what seems like an eternity.
The next day we see Jerry, who appears to have just regained consciousness, awkwardly marching to the store to confront Mike. The window is plastered with little notes saying "KEEP JERRY OUT", which doesn't stop him from trying to come inside. Mike refuses him, and suddenly Jerry starts vomiting on the sidewalk (a sign of radiation poisoning), causing Mike to break down and let him inside while he mops up the sidewalk. Jerry starts reorganizing all the tapes on the shelves, and eventually gets into a fight with a customer about where one of the tapes belongs. Mike kicks him out of the store, and Jerry continues baselessly mocking her about her supposed OCD with her household products as he leaves the store. We see Jerry walk down the street, being pulled to a lamp post (which he has to pry himself off of) and then a fence. Mike apologizes profusely, and he rents out a movie to her. The next day she returns to the store complaining about the tape being blank. Just as Mike tries to smooth things out, another customer comes in with the same complaint, and the female customer accuses Mike of trying to scam people. Mike continues to apologize and refunds her dollar, asking her not to tell Mr. Fletcher.
Jerry returns to the store later and discovers the place in a mess, with VHS tapes everywhere and Mike going through them seeing if there are any that haven't been erased. Jerry blames the TV, and gives it a slap. When he strikes the TV it goes haywire, but when Mike hits it nothing happens. Mike starts rubbing Jerry on the TV and flips out, telling Jerry he's been magnetized. Just then, Ms. Falewicz (Mia Farrow) enters the store to return Driving Miss Daisy. She chastises the two about the mess, and tells them that she talks to Mr. Fletcher every night on the phone (it is vaguely insinuated that there is some unrequited love between the two, but it's mostly left up to the imagination). She then tries to rent Ghostbusters, but Mike and Jerry try to come up with excuses to drive her away and Jerry tries to lie to her and tells her it has nudity in it. She doesn't buy it, and tells the boys that she'll be back before the store closes in a few hours to rent it, and if things aren't cleaned up she was going to tell Mr. Fletcher. Mike calls everyone he knows, asking them if they had a copy of Ghostbusters, but sans for one with a DVD copy, no avail. As he lies on the floor of the store, defeated and hopeless, he gets an idea and grabs the video camera. Him and Jerry are going to make their own version of Ghostbusters.
Jerry doesn't believe she'll ever buy it, but Mike insists as long as there's a distance between him and the camera, she'll never notice. Plus, he adds, it's not like she's seen it before or even watches any science fiction movies, so for all she knew they were all like this. They start their filming in the library, and we see the scene shown in the trailer with Jerry singing his own version of the Ghostbusters theme. They leave the library after "capturing" a ghost (which was in reality a confused old lady, who had just walked away while they were "zapping her), and film some scenes back at the junkyard with Jerry's mechanic. They film the climax scene involving the Stay Puft Marshmallow Man on a cardboard diorama of a city that they built on the roof of a car. They set the marshmallow man on fire for the climax and leave it there burning, and rush to the store just in time to hand Ms. Falewicz the movie. They give a sigh of relief as she leaves, but then another customer comes in asking for Rush Hour 2. Mike tells him to come back tomorrow afternoon, and the customer reluctantly leaves, and Jerry rushes back to the junk yard after he realizes he left the marshmallow man burning, and now the car was on fire.
The next day they make Rush Hour 2 at various locations (like a playground, for all the climbing stunts), and Jerry's mechanic quits on them when Jerry refuses to kiss him. They rush to find a woman to replace him, and employ a young woman named Alma (Melonie Diaz) who stays with them the rest of the movie and assists the two in their scheme. Word of mouth spreads, and eventually customers begin lining up outside the store, wanting to view the store's "Sweded" copies of films. Jerry, who claimed these were the Swedish versions of the films, which were only about 20 minutes long each, coined the term “Swede”.
From there we see them filming a score of other movies, such as The Lion King, Boyz n the Hood, Men in Black, and Rocky. Jerry has since been purged of his radiation and magnetism in a funny scene which involved him puking outside again, and then peeing in the street, with his radioactive urine attracting all sorts of metal objects as it goes into the drain.
Then Mr. Fletcher finally returns, and is amazed to see the amount of people in the store, since it was usually empty. He's unswayed, however, as he holds a meeting with the three later on and discusses his plan to modernize the store by phasing out VHS in favor of DVDs by the end of the year. Mike, Jerry, and Alma eventually convince Mr. Fletcher to allow them to continue Sweding films, and he starts to get in on it as well. They also begin allowing their customers to be in their films, and we see Mr. Fletcher and Ms. Falewicz doing Driving Miss Daisy, which Mike and Jerry had previously attempted to do themselves, but failed.
Everyone is having a good time, and there are smiles all around. Until one day when some FBI agents (Sigourney Weaver and Paul Dinello) enter the store and inform them that they are infringing on copyright laws, and confiscate all the tapes. Dinello's character had previously been seen waiting in line to enter the store with other customers, claiming to be a curious customer from New York, which possibly may have been how they were tipped off. In front of the store, the community watches as the FBI agents direct an operator of a steamroller to thoroughly crush all the tapes. The crowd breaks up, and everyone is heartbroken. Inside the store, Mr. Fletcher comes clean and tells the three about the building's impending demolishment, which causes Mike to try and think of ways to save it including trying to say it was a historical landmark because Fats was born there. Hesitantly, Fletcher admits to Mike that he made it all up, and in reality Fats had never stepped foot in the building. He only told Mike the stories because Fats was a happy man, and he wanted to tell Mike happy stories when he was younger, but never got the heart to tell them they weren't true. Everyone is disillusioned and calls it a night.
The following morning, Jerry starts calling for Mike from outside, and Mike pops his head out of his window on the second story over the store. Jerry tries to tell him that while they're not allowed to make movies based on other movies, they can make their own movies, and he wants Mike to come up with new ideas. He gives in, and eventually they break Mr. Fletcher too. This is when we see them filming the Fats documentary that we got a taste of in the very beginning. They begin interviewing members of the community about the life of Fats, and while none of it had any truth to it, they all tell the most entertaining story they can. The three boys from earlier even come up with a story about how Fats' 6 siblings were gunned down by gangsters, who also happened to be ninjas. To help prepare for the film's premiere, which was also the same night as the scheduled demolishment of the building, Mike and Jerry break into the local big-name video store to try and steal a video projector, only to be caught by the store manager (Kid Creole) who has been secretly living in the porno room. It's hinted that there's a rivalry between the two old men, but it's never really touched upon. He tells the two boys that he'll pay for the windows they broke trying to break in, so long as they keep their mouth shut about his housing situation.
The night of the premiere, all the familiar faces we've seen throughout the movie gather in the store to view the film. Mike is filming up until the very last minute, because he wants it to be perfect, and he rushes back to the store with Alma, where everyone is delighted by his arrival. Jerry, who had been trying to prop up the television set on a bar stool so everyone could see, lets go of it and the TV crashes to the floor. Everyone gets mad at him, when all of the sudden the owner of the rival video store comes in with his projector and saves the day. They put up a white sheet over the main window looking out into the street, and begin to watch the movie.
Everyone is smiling and laughing, and Mr. Fletcher and Ms. Falewicz become a little close. The planner in charge of the demolition comes in and quietly tells Mr. Fletcher that everyone needs to leave, because they can't demolish the building until it has been vacated. Mr. Fletcher begs the man to at least allow them to finish watching the movie, which he reluctantly agrees to, and leaves the store to let everyone enjoy the rest of the film. Later on, Mr. Fletcher then takes a look outside and discovers that a large crowd has gathered outside of the store, consisting of policemen, construction workers, and even the planner. They had been watching the film through the window on the white sheet, and had all been laughing and enjoying it. As the film ends (both the one in the movie and the film itself), Mike, Jerry, Alma, and Mr. Fletcher (who is accompanied by Ms. Falewicz) all receive a round of applause from the crowd, and even the planner gives a big smile to Mr. Fletcher and pats him on the back. We are left guessing as to whether or not the demolition actually went through, or if the planner had a change of heart.
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