Grim is sued for dereliction of duty by his old rival, the Boogey Man. Grim, Billy, Mandy and Irwin are set to be exiled by the Underworld Court and placed in the custody of Boogey Man. Numbuh 3 of the Kids Next Door is the court-appointed Grim Reaper. Boogey Man reveals his plan is to steal the Horror's Hand, an object capable of transforming its holder into the scariest and most powerful being in existence. The group eventually escapes and plans to obtain the hand for themselves for various reasons.
Both groups eventually reach where the hand is held, Where they meet Horror, a living statue that cut off his hand, and placed his fears within it. To obtain the hand, two rivaling groups must embark on a race across the River Styx, as well as facing their worst fears. Grim and the children eventually find the hand, only to have it stolen by Boogey Man. He is however incapable of facing his worst fear, realizing that he is not at all scary. He suffers amnesia after a series of accidents, and ends up afraid of everything and everyone. Grim is reinstated as the Grim Reaper. In the end, a naked, cut up Billy comes from two weeks in the future to warn that if Mandy had used Horror's Hand, she would have taken over the world in two weeks. He eventually goes back to the future to make sure that things were set right. The credits roll, showing the aftermath for each character.
The epilogue shows how Billy went back to the future, and finds that Fred Fredburger obtained Horror's Hand from Grim's magic trunk and took over the world as the new Lord of Horror.