After Mystery Inc. successfully tackles the mystery of the Luna Ghost at a toy factory, tensions bubble to the surface among the gang members. Fred (Freddie Prinze Jr.), a self-absorbed glory seeker, clashes with Daphne (Sarah Michelle Gellar), who is fed up with being the perpetual damsel in distress, and Velma (Linda Cardellini), whose ideas Fred often pilfers without giving her due credit. In fact, during the Luna case, it was Velma's meticulous strategy that led them to success, albeit assisted by the haphazard escapades of Scooby and Shaggy (Matthew Lillard), who captured the ghost purely by chance. The revelation that the Luna Ghost was actually Old Man Smithers, enamored with Daphne, drives the gang into disarray, ultimately leading to their separation and leaving a distressed Scooby and Shaggy behind with the Mystery Machine.
Fast forward two years, an invitation arrives for the team to unravel a mystery at a horror-themed tropical destination called "Spooky Island." The owner, Emile Mondavarious (played by Rowan Atkinson), suspects a demonic curse is affecting the tourists who come each year. Upon arrival, the gang's chaos and lack of teamwork stand in stark contrast to the unusually well-behaved visitors. In hopes of reigniting their friendship, Shaggy and Scooby yearn to bond the team again, but Fred, Velma, and Daphne are bent on solving the mystery independently.
Fred has been busy promoting his latest book, Velma is now a NASA engineer focusing on hydro-powered missile defense, and Daphne has transformed into a capable fighter with a black belt under her belt. When Velma attends a mysterious performance presented by N'Goo Tuana (played by Steven Grieves) and his assistant, the famed luchador Zarkos (Sam Greco), she discovers rumors of vengeful ancient demons. Meanwhile, Shaggy becomes smitten with a girl named Mary Jane (Isla Fisher), who is surprisingly allergic to dogs, causing an unintentional rift with Scooby.
One fateful day, Scooby is led away into the woods by a stranger wielding a promise of hamburgers, only to face a demon. However, in a thrilling turn of events, Scooby fights back and escapes. The gang finds themselves trapped in a haunted house ride, where tensions flare between them, but they ultimately agree to cooperate to uncover the truth. Betrayed by the haunted house's concealed demons, the gang narrowly survives a deadly attack, with Fred discovering the control room in an unexpected fall.
Exploring further, Fred and Velma stumble upon a film meant to indoctrinate aliens about human customs, while Daphne unearths the Daemon Ritus, a pyramid artifact hinting at more sinister happenings. As the evening unfolds, Fred, Velma, and Mondavarious find themselves captured and possessed by the island's demons. Seeking assistance, Mary Jane contacts the Coast Guard, but they too fall under the demons' influence and ignore her cries for help.
In a dramatic confrontation, Shaggy, Mary, and Daphne face off against the demonically possessed Fred, who has lost all memory of their shared experiences. After a narrow escape on quad bikes, Shaggy realizes that Mary is in fact a demon in disguise. The following day, a miscommunication escalates tensions between Shaggy and Scooby, leading to their separation and another capture, this time of Daphne at the hands of Zarkos.
Venturing underground, Shaggy discovers a vat containing the souls of the possessed, leading to an exhilarating rescue of his friends. They soon learn that sunlight is their ultimate weapon against these demonic forces. A voodoo priest informs them that the demons are preparing for a Darpokalypse ritual that would ensure their reign for a millennium if a pure soul is sacrificed—preferably Scooby's.
With this new knowledge, the gang bands together, setting aside their previous disputes to thwart this grave threat. During the climactic confrontation, Shaggy prevents the demonic version of Mondavarious from sacrificing Scooby. In a shocking revelation, it is disclosed that Mondavarious is actually a robot controlled by Scrappy-Doo (Scott Innes), who has transformed into a monstrous force intent on destruction.
A series of clever maneuvers leads to the rescue of the souls, and the gang manages to eradicate the demons by reflecting sunlight through a skull-shaped disco ball. Ultimately, the heroes liberate the real Mondavarious and capture Scrappy and his minions, leading to a joyous reunion for Mystery Inc. as they overcome their turmoil, standing stronger together.
