It's been a year since Carmen (ALEXA VEGA) and Juni Cortez (DARYL SABARA) discovered that their parents, Gregorio (ANTONIO BANDERAS) and Ingrid (CARLA GUGINO), were secret spies and then had to rescue them and save the world. Now established "spy kids," the two are called in to rescue Alexandra (TAYLOR MOMSEN), the precocious daughter of the President of the United States (CHRISTOPHER MCDONALD), but are upstaged by rival spy kids Gary (MATT O'LEARY) and Gerti Giggles (EMILY OSMENT).
They're the children of Donnagan Giggles (MIKE JUDGE) who unexpectedly and suspiciously beats out Gregorio as the newly appointed head of the O.S.S. Things get worse when a bunch of waiters drug the adults at that promotion ceremony and steal a "transmooker" device that not only renders all spy gadgets useless, but also endangers the whole world.
Juni is then wrongly accused of being responsible and is fired as a junior spy, resulting in Gary and Gerti being assigned to recover the stolen device. Not content with that, Carmen hacks into the agency's computer, reinstates Juni and reassigns the Giggles to a case in the Gobi Desert.
She and Juni then assign themselves to the missing transmooker case and travel to a mysterious island where they hope to discover who's responsible. Gregorio and Ingrid then get word that their kids are missing and thus set off on a rescue mission accompanied - much to Gregorio's chagrin - by Ingrid's meddlesome parents (RICARDO MONTALBAN & HOLLAND TAYLOR) who were former spies themselves.
As the kids attempt to recover the transmooker, they must not only deal with the efforts of the Giggles clan trying to undermine them, but also the various mutant monsters that genetic scientist Romero (STEVE BUSCEMI) accidentally unleashed on the island.