Plot

The film opens with Carmen and Juni Cortez (Alexa Vega and Daryl Sabara) being tucked into bed by their mother, Ingrid (Carla Gugino). While Juni applies wart killer to his fingers, Carmen requests to hear the bedtime story, "The Two Spies Who Fell in Love".

Long ago, at a time of unstable relations between countries, a new breed of soldiers was created: super spies. Using their vast intellects and prowess in the art of stealth, they could stop wars before they even happened. The two protagonists of the story, both of whom were spies, were tasked with eliminating each other, but they ended up becoming infatuated with one another instead and soon fell in love. Despite being from opposing nations, they decided to marry, but this only painted a massive target on their backs for enemy factions that wished to see them dead. They ultimately chose to retire and start a family. Though unknown to the kids at this time, it's shown to the audience that Ingrid and her husband, Gregorio (Antonio Banderas), are the spies in the story and that these events truly occurred. Ingrid then says goodnight to her children. Carmen comments that the story needs a new ending, while Juni suggests the addition of monsters.

Later in their bedroom, Gregorio and Ingrid, now consultants secretly working for the OSS (Organization of Super Spies), talk about how Carmen and Juni, according to their school principal, have been keeping secrets from them; Carmen's been skipping out on school and Juni's self-proclaimed 'friends' are only in his head. Ingrid believes she and Gregorio are to blame due to them keeping their previous life secret, but he assures her it's for the best -- he fears that if they ever told the kids, it would plant 'visions of danger' in their minds should they ever leave them alone. During their conversation, Gregorio receives information from the OSS that several of their agents have gone missing, notifying Ingrid the following morning.

While driving Carmen and Juni to school, Gregorio nags Juni for being so attached to the children's show, "Floop's Fooglies," created by quirky inventor and visionary Fegan Floop (Alan Cumming), but takes notice that one of Floop's side characters, called 'Fooglies,' looks suspiciously like one of the missing OSS agents, Donnagon Giggles (Mike Judge). While dropping off the kids, Gregorio tries to build confidence in Juni by telling him that if anyone bothers him, that he should remember that he is a Cortez. But Juni asks, "What's so special about being a Cortez?", a question Gregorio is unable to answer. Before driving off, he notices Juni being pestered by one of the school bullies. He exits the car to try and resolve the conflict, but gets into a confrontation with the bully's dad, who's just as condescending. He fantasizes about beating up the dad to gain the love and appreciation of his disapproving son, but ultimately decides to back off. While having a moment to himself, Juni ponders out loud about running away to Floop's world in the hope of escaping the pestering from Carmen and the school bullies and gaining a true friend.

Little does Juni know that far away in his castle off the coast of South America, Floop is in a pickle of his own; he is being contracted by Lisp (Robert Patrick), the head of a nameless corporation, to build an army for them, and so far, the candidates he's given them (The Fooglies and Thumb-Thumbs, additional characters from the show) have been unsatisfactory to their liking. Floop then presents them with his newest invention: robot children, or as he calls them, "Spy Kids." They resemble real-life children almost one-to-one while possessing the intelligence and cunning of the best super spies in the world. However, it's revealed that they lack the brains, quite literally, to properly communicate. Lisp chastises Floop for not keeping with their schedule, and demands that he finish his army in two days or everything he's built will be reduced to ashes.

Back at the Cortez house, Gregorio is prepping to go on assignment to investigate the disappearances of the OSS agents, and despite his objections, he eventually allows an overeager Ingrid to join him. They call Uncle Felix (Cheech Marin) to watch over Carmen and Juni, and after being given coordinates by OSS superior, Miss Gradenko (Teri Hatcher), make their way underwater thanks to their spy vehicle. For the first time in nine years, the Cortezes were back in the game, but their excitement is cut short after realizing they now carry a heavy burden: concern for their children's safety. However, their thoughts are interrupted when they suddenly pick up a transmission from Floop, telling them they have something he desires, and they find themselves being chased by a sub. Gregorio tries to outrun it, but soon he and Ingrid end up getting engulfed by a much larger sub.

Back at the Cortez house, alarms start sounding, which confuses the children but puts Felix on high alert. He tells them to follow him to another part of the house, while proceeding to explain everything along the way; Gregorio and Ingrid are retired spies, and in reality, he's not their uncle, but rather an OSS agent assigned to protect them. He takes Carmen and Juni to a secret transport called a Super Guppy, then leaves to gather important valuables, telling the children to press the blue and green buttons in the Guppy in case he doesn't return. The house is then invaded by Floop's Thumb-Thumbs, whom Felix manages to hold off long enough for Carmen and Juni to escape in the Guppy. The Thumb-Thumbs give chase in their own boats, but the kids manage to flee underwater and continue on an automated course to their parents' safe house.

Imprisoned in Floop's Castle, Gregorio and Ingrid make an attempt to escape, winding up in the Virtual Room where Floop films his show. While admiring the simulated environments around them, they fall into a trap door that takes them to the dining area, where Floop himself is waiting for them, unimpressed by their pitiful breakout attempt. He gets acquainted with his captives and informs them of why they and the other OSS agents were captured; he is seeking the "Third Brain," an object of synthetic intelligence created and eventually destroyed by the OSS. Gregorio is revealed to have once been a part of the Third Brain Project twelve years ago, and he elaborates later on that when the OSS director expressed concern for the Brain's potentially destructive capabilities, he ordered the project terminated. However, the Brain itself couldn't be destroyed, so Gregorio faked its destruction and hid it away. He refuses to rebuild the project for Floop and is sent back to his cell via another trap door beneath his seat.

At the safe house, Carmen and Juni equip themselves with spy gear in hopes of rescuing their parents, and find a scrapbook containing pictures from their parents' wedding, leading them to figure out that Ingrid's bedtime story was true all along. To their surprise, they're visited by Miss Gradenko, who's there to take them under her protection. She fills them in on Floop's evil intentions and asks to know where Gregorio is keeping the Third Brain. This reminds Carmen to tell her the phrase, "the Third Brain lives," as instructed by Felix back at the house, but that only prompts Gradenko and her men to start searching the safe house for the Brain. Juni then finds the Thumb-Thumbs outside destroying the Super Guppy, leading him to conclude Miss Gradenko is working for Floop, and after a series of scuffles and chases with jet packs, the two children manage to escape the rogue agents and Thumb-Thumbs with the Brain.

While Floop is filming his show, he comes to a realization that it is lacking a key element, but his state of exasperation is interrupted by news of the children's escape from his assistant, Alexander Minion (Tony Shalhoub), a former OSS agent who was fired for attempting to insert his own personal concepts into the Third Brain Project. He pitches the idea of sending robotic clones identical to them to acquire the Brain, an idea that Floop reluctantly agrees to. They intercept Carmen and Juni at San Diablo, and despite Juni's efforts to destroy the Brain, he and Carmen are subdued and the clones end up leaving with the Brain in their possession. Despite their success, Floop eventually confesses to Minion that he no longer has the will or resolve to continue in building the army, but this is right around the time that Minion decides to assume control over all his operations, and has the robot children lock Floop inside the Virtual Room.

To find their parents and stop Floop, Carmen and Juni are forced to find Isador "Machete" Cortez (Danny Trejo), Gregorio's older brother and best man at his wedding. After they prove they're his legitimate relatives, they ask for his help. However, he declines, as he had a falling out with his brother since he sells his tech to those good and bad, even Floop, and because he doesn't want to feel burdened with watching over his brother for the rest of his life. He's nice enough to offer them temporary lodging and a plane to get them to Floop's Castle, but during the night, the kids steal some of Machete's tech and a map of Floop's Castle, flying away in the plane before he can stop them.

Along the way, they bicker and argue about their personal insecurities, which leads to them badly crippling the plane and eventually crash. Luckily, they jump ship into the water and sneak into Floop's Castle through an underwater cave. They acquire the parents' location thanks to the Fooglies, but end up separated when Carmen falls into a Thumb-Thumb producing chamber and Juni winds up in the Virtual Room with Floop. He initially fears Floop, but when he learns of Minion's evil intentions, he has a change of heart about him and, thanks to short-circuiting gum, frees the both of them. After bumping into Carmen, they make their way to the dungeon and free Ingrid and a Fooglie-ized Gregorio. Working together, they turn Gregorio back to normal and lure and trap Minion in the Fooglie-Making machine before making their way to the control room.

However, along the way, Carmen and Juni's robotic clones apprehend the parents again. This leads to another showdown between the children and robots, while Floop tries to reprogram all the robots. Carmen and Juni manage to subdue their clones before meeting back up with their freed parents at Floop's throne room where Lisp, Miss Gradenko, and a Fooglie-ized Minion are residing. The family prepares themselves to take on the massive army of robot children summoned to the throne room, each with a duplicate of the Brain within them. Machete shows up to offer assistance, but at the last minute, Floop is able to program purity of heart and mind into the robots, causing them to attack the villains instead, tossing them around like toys.

Afterward, Gregorio and Machete settle their past differences, Minion and Carmen and Juni's clones become characters on Floop's show, the robot army starts being used for the good of mankind, and Lisp and Gradenko presumably get arrested. As the film ends, the family is eating breakfast back home before receiving a communique from Devlin (George Clooney), Director of the OSS, requesting Carmen and Juni for a new assignment. Carmen tells him that the Cortezes will only accept missions not as individuals, but as a family, before ending the transmission.