The OSS now has a full child spy section, of which 13-year-old Carmen Cortez and 10-year-old Juni Cortez have become agents. Even though they were the first of the new Spy Kids Division, they are not considered the top spy kids,[5] and soon they face particularly difficult competition from Gary and Gerti Giggles, the children of double-dealing agent Donnagon Giggles, whom Carmen and Juni helped to rescue in the previous film. It is shown that Carmen defends Gary, and has a crush on him, which strains her relationship with Juni.
At a gala event, Donnagon somehow hacks into the teleprompter which the president was reading from, and is named director of the OSS. A fight ensues when a group of Magna Men arrive and render all adults unconscious. They are after the "Transmooker", a highly coveted device which can shut off all electronic devices. Juni recovers it, but drops it when Gary tries to take it from him. Gary then frames Juni for the loss, resulting in Juni being fired. In his new position as director, Donnagon can carry on with his plan to steal the Transmooker, so he can rule the world.
The next morning Carmen hacks into the database and reinstates Juni as an agent. They take a mission meant for Gary and Gerti to recover the Transmooker. She and Juni use some hints from Alexander Minion, and follow the trail to a mysterious island where all electronics refuse to work. Gary and Gerti meanwhile are sent to the Gobi Desert and while trying to pinpoint their position manage to fall into a pit of feces. Shortly after arriving Carmen and Juni meet Romero, a lunatic scientist. Romero has been attempting to create genetically-miniaturized animals, so he can make a profit by selling the animals to kids in "miniature zoos." He had an experiment go wrong after accidentally pouring growth concoction onto the mutated set of animals. As a result, he is unwilling to leave his lab, out of fear of being eaten.
When Carmen is captured by a Spork, a breed of flying pig, she is dropped into its nest with Gerti, who reveals to her that Gary is genuinely evil. Carmen changes her feelings for Gary after he tries to kill Juni, and she sides with her brother. Romero, having been encouraged by Juni, finds out that his creatures are much friendlier than he thought. Carmen and Juni eventually find and recover the Transmooker, and are surprised when they are joined by their family, who were informed of their disappearance. The group is then confronted by Donnagon, who takes the Transmooker and attempts to use it to destroy the Cortez family, but it malfunctions. Gerti reveals she sabotaged it and threatens Donnagon with telling everything to her mother.
The President and his staff arrive on the island. Donnagon is fired by the President and his daughter, Alexandra; Gary is temporarily disavowed, and Gregorio is appointed director of the OSS by Alexandra on her father's behalf. Even though he is offered a promotion, Juni resigns due to the impersonal treatment he had received by the OSS after being framed. As the Cortez family leaves the island, Romero gives Juni a miniature spider-monkey as a gift, and all the island's inhabitants bid farewell to the Cortez family.
During the credits, Machete has Carmen sing as an undercover pop star in a concert. Carmen says she cannot sing so Machete gives her a microphone which auto-tunes her voice, and a belt that helps her dance. He also gives Juni a guitar that plays itself. After a successful performance, Carmen and Juni return to a shocked Machete, who discovered that he never put batteries on the device. They are shocked to find out they have actual musical talent. As the credits come to a close, Dinky Winks[who?] paddles to Romero's island to strike up a business deal.
