Composer Peter Bretter (Jason Segel) has spent five years adoring his girlfriend, television star Sarah Marshall (Kristen Bell), despite living completely in her shadow. His income comes from composing the score on a highly-rated CSI-type crime drama show Crime Scene: Scene of the Crime, a job that in actuality mostly consists of playing repetitive "dark and ominous" tones during forensic scenes. Sarah, whom he met on the job is a high-profile star of the show, enjoying her place in the spotlight while trying to parlay her television fame into a movie career; Peter is writing a puppet Dracula musical called A Taste for Love.

Things take a twist when she breaks up with him.

At the suggestion of his step-brother Bryan (Bill Hader) that he go somewhere to clear his head, Peter takes an impulsive trip to Hawaii, and is confronted by his worst nightmare: Sarah and her articulate, narcissistic new British-rocker boyfriend, Aldous Snow (Russell Brand) of the band Infant Sorrow are also staying at the resort. After Rachel (Mila Kunis), the sympathetic receptionist, watches the painful run-in at the hotel lobby, she gives Peter a free stay in the top-end $6,000 per night suite on the condition that he clean up after himself.

Between crying alone in his suite, drinking alcoholic cocktails from the early morning onwards, and tormenting himself with the reality of Sarah's new life as he bumps into her and Aldous around the resort, Peter finds relief when talking with Rachel whose laid-back approach tempts him to rejoin the world. Although they bond and get along well, she is also reluctant to move things forward too soon, because she too has been recovering from a recent heartbreak.
Simultaneously, Peter becomes friends with many of the hotel staffers and, along with Snow, also offers advice to a devout newlywed named Darald (Jack McBrayer), a Mormon who is having trouble satisfying his new wife, Wyoma's (Maria Thayer) sexual appetite.

Throughout the film, Peter has flashbacks that reveal the negative aspects of his old relationship, which he mostly ignored or was completely oblivious to.

Sarah begins to feel remorse about the breakup and starts to remember the happy times with Peter. Her renewed appreciation for Peter is further displayed when she gets jealous upon seeing him and Rachel prepare to go hiking. Going on a said hike, the two of them end up jumping off a cliff into the ocean and kissing for the first time.

Because they run into each other at the resort, Peter finds he actually likes Aldous and then Aldous uses this new openness to tell Peter he had been dating Sarah for over a year at that point. Peter tries to surf away from him, but in the end Peter crashes into Aldous and they both become unconscious. Both Peter and Aldous are brought to Sarah's room and Peter and Sarah have a heart to heart chat.

Soon after, the two couples run into each other at dinner and end up at the same table. Sarah now realizes that she wants Peter back, even more so when her relationship with Aldous fizzles and he leaves her, giving Peter a warmer farewell than Sarah. In the end, when Peter comes to comfort her for her loss, she begs him to take her back. Though he is initially reluctant, they have a brief physical encounter that Peter cuts short, realizing he cannot get an erection because he is not attracted to her anymore due to years of enduring her repulsive and calculating behaviors. Deciding that she is not worth it if she didn't love him before, he tells her off, calling her the Devil as he leaves. Peter then decides to stay true to Rachel and divulges what happened between him and Sarah moments before, but it backfires – an enraged Rachel tells him to never speak to her again. Before he leaves the hotel, Peter wordlessly hands Rachel a topless photo of herself; it had been put in a local bar's wall collage by her nasty ex-boyfriend and Peter endured a beating from the bar's tough-guy owner to get the photo back to Rachel.

When Peter returns home he finally finishes writing his comedy, the vampire rock opera over a course of personal reflection that allows him to fully recover from his breakup. The opera is soon staged as a black box theater production and on its opening night, all the staff members Peter befriended at the hotel are invited and show up, as well as Rachel, who didn't want to come but had been convinced to do so by the staff members. In the end, Peter and Rachel reconcile their differences and move on to continue their relationship.

A post-credits scene shows that Sarah later managed to get a job similar to her previous character on another crime drama called Animal Instincts which has Sarah starring as an animal psychic police officer.

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