Mystery Inc. (Fred, Daphne, Velma, Shaggy and Scooby-Doo) attend the opening of an exhibition at the Coolsonian Criminology Museum commemorating their past solved cases with monster costumes on display. However, the celebrations are interrupted by a masked man known as the Evil Masked Figure who steals two costumes using the reanimated Pterodactyl Ghost. The gang are ridiculed by journalist Heather Jasper Howe, who starts a smear campaign against them. Concluding an old enemy is the mastermind, the gang revisit old cases, dismissing the former Pterodactyl Ghost, Jonathan Jacobo, due to his death during a failed prison escape, they guess that Jeremiah Wickles, the Black Knight Ghost’s portrayer and Jacobo's cell mate in prison, is the culprit.
Going to Wickles mansion, Fred insists on ringing the door bell twice, which activates a trap door that drops the gang into a cage. Velma identifies that the lock can be unlocked with Wickles's fingerprint. Daphne ingeniously releases them all using the makeup from her bag to recreate the previous thumb print left by Wickles, thereby effectively unlocking the prison. The gang find a book that serves as an instruction manual on how to create monsters. Shaggy and Scooby-Doo find a note inviting Wickles’s to visit the Faux Ghost nightclub. They are attacked by the Black Knight Ghost, but escape when Daphne fights him off while Velma discovers its weak spot and disables it. Before fleeing, the rest of the gang had previously discovered through the book found in Wickle's mansion that the key ingredient to creating the monsters was a substance called "randomonium", which can be found at the old silver mining town.
After Daphne helps Velma overcome her fears of intimacy and assert herself by changing up her image, Daphne, Velma and Fred go to the museum, accompanied by the curator Patrick Wisely, but discover that the rest of the costumes have been stolen. Heather Jasper Howe ridicules the gang further by turning the city against them. The gang go to the mines, finding Wickles's plans to turn it into an amusement park. As they confront Wickles, he states that he and Jacobo were cell mates who hated each other and that he has no connection to the museum robberies.
Shaggy and Scooby, after overhearing the rest of the gang criticizing their tendency to bumble every operation, and especially their most recent offense failing to tie the rope and secure the Pterodactyl Ghost, resolve to better themselves and become real detectives. Following a lead from their first clue ever, which was stuck to Scooby's foot after he played around in Wickles mansion, sneak into the Faux Ghost to try and solve the mystery. After speaking to Wickles, they learn he has resolved his ways. Scooby eventually causes a scene and his disguise falls off, leading Scooby and Shaggy to escape through a trash chute. On their way out, they spot Patrick uncharacteristically assaulting who appears to be a member of his staff, ordering him to find answers to who vandalized his museum. Escaping an awkward interaction with Patrick, Shaggy and Scooby spot Wickles leaving the bar and follow him.
The gang then find the Monster Hive where the costumes are brought to life as real monsters. Shaggy and Scooby play around with the machine’s control panel, bringing several costumes to life, and the gang flee with the panel as the Evil Masked Figure terrorizes the city. Escaping to their old high school clubhouse, the gang realize they can reverse the control panel’s power by altering its wiring. Captain Cutler’s Ghost emerges from the bayou, forcing the gang to head back to the mines, encountering the various monsters along the way. Velma sees Patrick in the mines, finding a shrine dedicated to Jacobo built by Patrick, but Patrick proves his innocence by helping Velma after a catwalk unexpectedly gives way under her.
The gang confront the Evil Masked Figure as Tar Monster captures all of them but Scooby, who uses a fire extinguisher to freeze the Tar Monster’s body. He reactivates the control panel, transforming the costumes back to normal. The gang take the Evil Masked Figure to the authorities, unmasking him as Heather. When asked why did she do all this, Velma suddenly pulls and peels Heather's face off, revealing she is actually Jacobo in disguise, having escaped death and sought to get revenge on Mystery, Inc. by discrediting them. Jacobo’s cameraman Ned is also arrested as an accomplice. Mystery, Inc. are praised as heroes once again in Coolsville. In the Faux Ghost, the gang celebrates their victory with the now reformed criminals whom they unmasked in the past (including Wickles).
After the credits, Scooby-Doo is seen playing a Scooby-Doo 2 Game Boy Advance game. After he succeeds, he tells the viewers to enter the Scooby-Doo 2 Game Boy Advance code. (This is only seen on the VHS and DVD release)