Boston, 1985. The narrator (Patrick Stewart) introduces us to 8-year old John Bennett (Bretton Manley) who is the most unpopular kid in the neighborhood. He wishes nothing more than to have a friend. Christmas morning arrives and John unwraps a brand new stuffed Teddy Bear whom he takes an immediate liking to. He names the bear Teddy, or Ted for short, and hugs him tightly. Christmas night, John lays in bed with Ted, and upon spotting a shooting star out his bedroom window, John wishes that Ted could talk and be his best friend. The next morning John awakens to find Ted walking & talking, all because of John's wish. John hurries downstairs and surprises his parents (Alex Borstein & Ralph Garman) with the newly sentient Ted. His parents go ballistic, even threatening to shoot Ted, but they are easily calmed. Ted becomes an overnight celebrity, and lives the life of a child star. He visits the Johnny Carson show, and graces innumerable magazine covers. Sadly Ted's celebrity star fades, and after numerous drug-related arrests, he hits bottom, becoming a has-been.
Present day. John, now 35 (Mark Wahlberg), and Ted (voiced by Seth MacFarlane) continue to be best friends. They watch re-runs of Flash Gordon and smoke pot together. John has been steadily dating Lori Collins (Mila Kunis) for almost four years, and John sometimes finds it difficult to prioritize who deserves his love more: Lori or Ted. On this morning John is late for work at the rental car agency, and fearing that he's too stoned to drive, Ted drives him to work. John's boss (Matt Walsh) chews John out for being both late to work, and stoned, and reminds him that he can't ever promote John unless he his does his job. John's co-worker "Guy" (Patrick Warburton) comes to work with a large black eye, unsure where he got it from, but insinuates that it might have something to do with the gay texts he's been getting at night. John asks Guy and his other co-workers where he should take Lori for their fourth anniversary, but they tell John to propose instead. John is unsure what to do. He returns home and speaks to Ted, asking if a proposal is a good idea -- Ted is unsure how he feels about his best friend marrying someone else.
That evening John and Lori dine at a five star restaurant, and at the end of the meal he pulls a small jewelry box out of his pocket, and tells Lori that he's wanted to give her this for a long time. She opens the box and finds a pair of cheap, shopping mall earrings, and not the engagement ring she was hoping for. Frustrated, Lori reminds John of the night they met four years earlier and asks if he even remembers the details of their first night together; he does: While dancing at a club he accidentally ran into her and knocked her over. Afterward the two returned to his apartment and watched "Octopussy" well into the morning. Lori, though touched by his terrific memory, insists that Ted move out, so they can marry and live together just the pair of them. John is less than enthusiastic about kicking Ted out, insisting that it would be heartless to ditch his best friend of 27 years. Lori essentially gives John an ultimatum: her or Ted. The pair return home to their apartment where they find Ted, a mess, and four prostitutes stinking up the apartment. Worse yet, during a game of truth or dare, one of the prostitutes, Sauvignon Blanc, was dared to take a dump in the middle of the living room floor, which she did. This is the last straw for Lori, who demands that Ted move out.
John takes Ted to the aquarium to talk. There he explains that Lori wants Ted to live somewhere else. Ted, sensing he's crossed the line with the pooping prostitutes, agrees and the two start looking for a job for Ted. While they stroll through the park, Ted is mobbed by fans, including an oddly creepy father & son, Donny (Giovanni Ribisi) and Robert (Aedin Mincks), who attempt to buy Ted from John. John turns them down and the pair head off, but not before Donny gives John his business card. Ted wears a business suit to his job interview at a small supermarket. Ted doesn't want to work minimum wage jobs after having been a celebrity in his youth. He intentionally bombs the interview; he cusses out the store manager and jokes that he had sex with his wife. The unbalanced store manager mistakes Ted's profanities as a sign of strong character and hires him on the spot. Ted is frustrated. John helps Ted move into his crappy Boston apartment, which sits above a chinese restaurant.
At work, Lori refuses repeated sexual advances from her boss Rex (Joel McHale) who seems to ignore the fact that she's in a long-term relationship. He invites her to a house-warming party he's throwing in a few days.
At the car rental place John gets a phone call from Ted, who pleads with John to skip out of work for an hour so they can watch Cheers DVDs together. John takes some convincing but ultimately agrees to come over. He tells his boss Thomas that Lori had an accident involving some wild dogs, and that he needs to run off to help her. At Ted's place the two smoke pot and laugh at the Cheers behind-the-scenes interviews. Ted tells John that his job at the supermarket is going well and that he's even met a girl named Tami-Lynn (Jessica Barth), and that the two of them regularly disappear into the store room to have sex. One time the boss walked in on them, and inexplicably promoted Ted. That evening Ted, after work, walked out to the parking lot by himself and is confronted by Donny, who once again attempts to buy Ted. Tami-Lynn arrives and reminds Ted of their double date with John and Lori. Donny disappears. The foursome's dinner date does not go well. Tami-Lynn is offended by Lori's "snootiness" and storms out of the meal whilst cussing out the entire restaurant.
The next day Lori confronts John about a weird phone call she received from Thomas, about an accident she had with some vicious dogs. John comes clean and admits that he skipped work to hang out with Ted and made up a poor excuse to do so. Lori is angry and tells him that he is on incredibly thin ice; one more slip-up and they are over. They head to Rex's house-warming party. Lori is met by a very excited Rex, but John is treated like crap, as Rex makes no attempt to veil his hatred for him. Halfway through the party Ted calls John and tells him that THE Flash Gordon, Sam Jones, is at his party and he's wearing the costume. John immediately goes to Rex and tells him if he can cover for him for 30 minutes, he'll owe his life to him, and will stop wishing Lou Gehrig's disease upon him. He leaves without telling Lori. John shows up to the party, which is tremendously loud and full of people, and immediately spots Sam Jones. John's co-workers are there, including Guy, who has brought his new boyfriend, Ryan Reynolds (Ryan Reynolds). Time gets away from John. The trio of John, Ted and Sam do cocaine, punch through walls, get in fights with the chinese neighbors, and before he knows it hours have passed and Lori shows up. She demands her car keys and tells John that their relationship is over as of that moment. Ted comes running out of the apartment and is promptly cussed out by John. John severs their friendship.
Rex pounces upon the newly single Lori, and invites her to a Norah Jones concert, which is happening that night. Lori is reluctant to start any new relationships, but is promised by Rex that if the date goes badly, he'll stop pursuing her. John is living at a cheap motel. He hears a knock at his back window; it's Ted. Ted apologizes for his selfishness and tells John that he saw Rex picking up Lori at his apartment and learned that they're going to the Norah Jones concert. The pair shout at one another, insisting that the other is responsible for their falling-out. They fight and trash that hotel room in the process. As the fight ends, Ted apologizes for his role in John's breakup and insists that all he wants is to help. They hurry to the concert and Ted, who had a fling with Norah Jones in the past, sneaks them both backstage. Halfway through the show John takes the stage and through song, apologizes to the watching Lori. The crowd boos, a riot nearly breaks out, and John's tribute to Lori ends badly. In the parking lot Rex berates John's stupidity, but Lori laughs him off, saying that it was romantic. She shuns his advances once again and takes a cab home.
Ted visits Lori's apartment and pleads with her to give John another chance. He takes the blame for John leaving Rex's party and insists that John loves her and wants to marry her. Lori gets dressed and leaves Ted in the apartment. While Ted fishes for beer in the fridge, he hears a knock at the door -- it's Donny & Robert. They stuff Ted in a pillow case and kidnap him. John eats lunch at a diner. Lori finds him there and the two talk briefly. John accepts her breakup and wishes her a good life and the two part amicably. Ted awakens in the back of Donny's station wagon and is dragged into Donny's creepy house. Inside Ted is shocked to find a wall devoted entirely to him: magazine covers, paparazzi photos, polaroids. Donny is obsessed with Ted, and has been obsessed with him since the 80s. As a child Donny wanted his own talking teddy bear, but his dad refused. Donny made it his mission in life to get Ted for his own son when he was old enough. Ted is taken to Robert's room, where he is physically abused by Robert, who tears one of his ears off. Ted cradles his ear and convinces Robert to play a game of hide-and-go-seek. Robert excitedly agrees. Ted sneaks out of Robert's room. He heads downstairs where he finds a stapler with which he reattaches his severed ear. He finds a phone and calls John.
John walks along the road by himself and doesn't notice Lori tailing him in her car. She pulls over and invites John to have a ride. The two discuss their differences, their goals, and make up. John's phone rings repeatedly. After repeatedly ignoring the calls, he finally answers -- it's Ted. He explains how Donny and his kid kidnapped him and that they need to come get him. John finds Donny's business card in his wallet and they head to his house. Donny walks in on Ted talking on the phone, and cuts the cord. Donny & Robert throw Ted into the back of their station wagon and take off. John and Lori pull in to see Donny and Robert driving away with Ted in the back window. Lori and John chase after Donny at high speeds. Ted breaks out Donny's back window and manages to leap onto Lori's hood, but is soon thrown back into Donny's car. The pair of cars collide just outside of Fenway Park and come to a stop. Ted climbs out of Donny's back window, tearing his fabric in the process, and spills stuffing on the street as he runs. Donny and Robert chase after him, with John and Lori shortly behind them. The five run through the bowels of Fenway Park. Robert, who is too fat to squeeze through the tight spaces that Ted & his father can, tries attacking John and Lori but is laid out with a single punch from John. Ted attempts to escape Donny by climbing one of Fenway's towering lights, but he is soon caught. Donny grabs hold of Ted's lower body and accidentally widens the tear at his midsection. Ted is torn in half, and tumbles to the grass below. Donny lowers himself off the light-tower and runs from the cops who have now surrounded the stadium. John and Lori run to the bifurcated Ted who is laying in a pile of his own stuffing. His eyes glaze over and Ted apparently dies, returning to his stuffed, insentient form.
John and Lori rush Ted back to the apartment, where they hastily sew him back together, but it does no good. Ted doesn't speak, he doesn't move. He doesn't wake up. John spends the night awake, staring at Ted's shrouded body. Lori, unable to sleep, looks out her bedroom window and sees a shooting star cut through the sky. She makes the same wish that John made 27 years earlier. The following morning John lifts the blanket which covers Ted, but Ted is still just a stuffed bear. Slowly Ted's eyes blink. He looks around and stands up. Alive, he speaks to John, although his speech is labored and his face is partially paralyzed; he says it is due to John and Lori's shoddy reconstructive surgery. It's all a joke. Ted is fine. The two realize that it was Lori's wish that saved Ted. She smiles and says her wish was not to save 'his' life but 'her' life. John, happier than ever, proposes to Lori, and she eagerly accepts.
John and Lori have their wedding at a cathedral, and are married by Flash Gordon/Sam Jones himself. The newlyweds drive off, and the narrator describes how the pair lived happily ever after. In the epilogue Ted, despite insulting his boss at the market many times, is promoted to store manager and now lives with Tami-Lynn. Rex was diagnosed with Lou Gehrig's disease and died. Sam Jones decided to return to his Hollywood career and now shares a one-room studio apartment in L.A. with "shitty" Superman Brandon Routh. Donny was quickly arrested, but the police were unable to hold him on a charge of 'kidnapping a stuffed animal' and the charges were dropped. Robert, Donny's son, under the advisement of Ted, lost a substantial amount of weight and grew up to become Taylor Lautner.
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