Plot:
A historical ceremonial pow wow opening features a medicine man tossing a knife and tomahawk at a young brave warrior to test his faith in the Great One and true courage. He also shoots an arrow at him to test his purity of heart. Jim Varney reprises his role of Ernest P. Worrell, working as a maintenance man at Kamp Kikakee and hoping to become a counselor. With his typical enthusiasm, he pours himself into the role and quickly becomes a valuable addition to the staff, in particular for his passion at learning the specialized sign language used by Kikakee's owner, Chief Saint Cloud (Iron Eyes Cody), who does not speak English.
Ernest gets his chance at counseling when he is assigned a small group of juvenile delinquents whom the regular counselors are hesitant to take on — primarily because the group hospitalized their first counselor, the militant Ross Stennis (Eddy Schumacher). Ernest quickly takes the side of the boys, due to his compassion and for having suffered his own abuse at the hands of Stennis. The boys are initially unenthusiastic, but start to show a little respect during a campfire session when Nurse St. Cloud (Victoria Racimo) translates her grandfather's description of the warrior initiation ritual for his tribe. The initiate must hold still while a knife, a stone hatchet, and an arrow are thrown or shot at the target. It is implied that the courage of the young warrior actually alters the course of all three to prevent his death.
Meanwhile, an evil mining corporation run by the ruthless Sherman Krader (John Vernon) has its sights on Kikakee, a site rich with the fictional mineral petrocite. However, Chief St. Cloud refuses to sell. Krader manipulates Ernest, one of the few people who speaks the chief's language, into convincing St. Cloud to sign away the land, believing it to be a conservation petition. With the camp in danger of being destroyed, Nurse St. Cloud tries to talk Ernest out of doing anything rash until she can get a lawyer. She firmly believes that they can win the case if they can get to court, but Ernest objects, knowing that by the time they can get to a hearing, Krader will already be tearing down the camp for a strip mine.
With the boys in tow, Ernest storms into the miners' construction site and demands words with the boss. Krader is not present, so the foreman (Lyle Alzado) meets Ernest's challenge instead, savagely beating him up. A dispirited Ernest then leaves the camp for a while to be alone. When Nurse St. Cloud overhears the kids verbally demeaning Ernest's effort, she chastises them and reveals that Ernest is the only person who ever defended them, both to the authorities and to the camp staff, mostly because he was the only one who really cared about them. When they learn about the sacrifices that Ernest has made on their behalf, they resolve to find him and apologize. In doing so, Ernest and the campers quickly mend their relationship through their newfound respect for him.
Krader is still poised to demolish Kikakee, and when the regular staff and campers are sent home, the group decides to risk openly attacking the construction site to stall for time. Recruiting the Second Chancers, the two regular campers who usually picked on them and the chefs Jake and Eddie, Ernest plans a full-scale assault as the construction company begins to demolish Kikakee.
The group works feverishly to create a series of improvised weapons, including flaming arrows to shoot into piles of explosives and flammable barrels that the company had stacked up by their camp. Prior to the attack, Chief St. Cloud arrives to pass along a native blessing, though Nurse St. Cloud begs them not to go through with it. They also catapult in a group of box turtles who have had parachutes attached. The assault quickly cripples the construction site's equipment. However, the foreman escapes in a bulldozer and destroys several camp buildings. The group stops him by filling the back of Ernest's motorized maintenance cart with explosives (including Jake and Eddie's unpleasant "Eggs Erroneous" cooking) and rolling it into the bulldozer, destroying it. Ernest then knocks out the foreman with one punch.Krader arrives at Kikakee and pulls out his high-powered hunting rifle, targeting Ernest. Echoing Kikakee's ancient testimonial pow wow, Ernest faces down Krader and apparently passes the age old test as Krader takes three shots at him, missing every time. Ernest then plugs Krader's hunting rifle with his finger and laughs in his face, signaling his defeat. The police arrive and Krader is arrested. The boys and Ernest succeed in protecting the land and Kamp Kikakee remains for young campers to enjoy, particularly when Nurse St. Cloud returns with a restraining order. Ernest remains a counselor, although he also still remains his clumsy, inept (yet good-hearted) self.