The episode opens with Milo, Zack, and Melissa hanging from a branch on a cliff face and wondering if this is their worst - or best - adventure yet. Milo and Melissa mention the llama incident which prompts Zack to ask, what is the "Llama Incident" that has been mentioned several times in the past. Milo tells Zack that in the year 2000, a man from Boston inherited his late uncle's llamas from his llama farm. Fifteen years later they were used in plays. Milo and Melissa attend Llamlet. After, the llamas are spooked and take off with Milo's backpack. As the Milo and Melissa chase the actors, more llamas join in the run which ends aboard a ship heading to the arctic. When they arrive in the artic, they encounter a polar bear. Milo retrieves his backpack from which he produces a tee-shirt cannon, uses it to launch knockout gas at the polar bear and scare the llamas back. Milo and Melissa then take a dogsled driven by llamas, a plane, and a public bus system back to Swamp City.
While trying to find pistachios to get the llamas back to their theaters, Melissa gets covered in pistachio gelatin being transported by Vinnie Dakota and Balthazar Cavendish. She runs and the llamas give chase until they reach the Jefferson County Middle School football field during a game. The llamas start to cause havoc. Then the story is interrupted by a woodpecker pecking at the branch they are on but Milo continues the story to distract them. Milo then attaches seatbelts to a wire that runs across the field so Melissa can escape. She winds up on top of the wire grasping a flag one of the cheerleaders tossed up. Milo then has Diogee herd the llamas underneath Melissa to cushion her fall. Zack is impressed by the story and has an idea how to get down safely just as the branch breaks. Three shapes plummet to the ground and break, releasing a red liquid. It is revealed that the shapes were flesh colored bags of red paint Mort dropped at his new job.Milo, Melissa and Zack tell Mort they have fallen off a cliff. Mortis amazed and asks how they survived. Zack explains, calling it "The Woodpecker Incident".
His story is shown via a series of five flashbacks wherein Milo, Melissa and Zack are tied to a flock of birds and fall onto the Statue of Liberty, walking on stilts through alligator infested swamps after a Ye Olde Pizza truck had crashed. Then jumping over a shark in a shopping cart while being chased by monkeys, a clown, and holding a map and vacuum cleaner.
When Milo first began explaining the Llama Incident to Zack, the football player that spoke was voiced by Greg Cipes. Later, however, when the same scene was shown again, Dan Povenmire voiced him.
The music heard as Milo and Melissa flashback to their trip to the llama district is the same music heard in the Phineas and Ferb episode Backyard Hodge Podge when Linda has a hallucination of 3 dancing pies.
A Pistachion can be seen during one scene when the llamas are tackling a Tiger football player (It occurs shortly after the Tiger Fan rips off his shirt and then two llamas rip his pants off.) This is a reference to the fact that Milo brings Dakota and Cavendish to this time period to lose the Pistachions that are pursuing them in the episode Missing Milo, despite the fact that The Llama Incident came out before Missing Milo.
In the flashbacks of the llama incident, famous Broadway musicals were being replaced by the word "Llama". These shows are: