Plot
One year after the previous film, Marnie Piper prepares to begin a new school year. She asks the Halloweentown Council to work toward openness between Halloweentown and the mortal world. She proposes bringing a group of Halloweentown students to her own high school in the mortal world. The council is initially apprehensive, mostly due to the legend of the Knights of the Iron Dagger: a fanatical order of knights who wanted to destroy all things magical. The Halloweentown High Council, however, agrees to accept the plan after Marnie mistakenly bets "all the Cromwell magic" that her plan will work. If she does not prove she is right by midnight on Halloween, then her entire family will lose their magical abilities. Marnie, regretting what she said to the council, wants to cancel the program she has made, but her grandmother Aggie opposes, saying that they have nothing to fear.
The Halloweentown students arrive and are magically given human appearances to disguise their true non-human natures. School begins with Marnie acting as a tour guide for the exchange group, claiming they are from Canada. Aggie substitute teaches so she can be available in case of need. Cody, a new student, shows a romantic interest in Marnie.
While Aggie proves unable to teach any subject effectively, the Halloweentown students keep to themselves, hiding in the refuge that Aggie magically creates for them in a remote student locker. Marnie gradually encourages the students to join sports teams, school activities, and to make new friends.
Marnie's progress is interrupted by a warning that appears to be from the Knights of the Iron Dagger, then by a magical incident at the mall that results in the Halloweentown students assuming their natural appearances in public. This is followed by a break-in at the secret magical locker and the disappearance of Cassie.
Meanwhile, Marnie's developing relationship with Cody parallels an unexpected romance beginning between Aggie and the school's principal Phil Flanagan. Aggie suspects Cody of being the cause of the trouble and tries to convince Marnie to halt their relationship, but Marnie in turn suspects Flanagan. They eventually discover that Flanagan is the Knight in question; he was told prior to the students' arrival that he was the last of the Order.
Edgar Dalloway, head of the Witches' Council and father of one of the students, is the real root of their problems. He wants to keep Halloweentown isolated from the mortal world, and used Flanagan to ensure the failure of Marnie's project. This, he hoped, would cause a negative reaction in Halloweentown and keep the portal between Halloweentown and the mortal world closed.
The Halloweentown students use the school's Halloween carnival to improve mortal attitudes toward magical folk. Their haunted house depicts the ordinary lives of creatures that have typically been seen as monsters in the mortal world, including displays like the "Monster Tea Party" and ogres "picnicking in their natural setting", which winds up boring the carnival goers. Meanwhile, Marnie's mother Gwen uses a Witch's Glass to hunt down Cassie.
At the school carnival, Dalloway launches magical attacks against the mortal students by bringing the inanimate monsters in the haunted house to life. The ensuing panic spirals beyond Marnie's and Aggie's ability to contain the monsters. Flanagan incites a mob to corner the Halloweentown students. Cody tames the crowd, the students reveal themselves, and the crowd accepts them for who they are. Flanagan also renounces being a knight and accepts Aggie.
Dalloway claims the Cromwell magic and explains that his son Ethan helped with most of the things that happened, but Gwen has shown the evening's events to the Halloweentown High Council. They return the Cromwell magic, Gwen returns with the imprisoned student, and the Council imprisons Dalloway in another Witch's Glass taking his disagreement with them as a form of resignation and taking the families magic.
The portal between Halloweentown and the mortal world opens inside the haunted house, and crowds of children from Halloweentown cross over to enjoy the carnival together with children of the mortal world. Marnie flies off for a romantic broom ride with Cody. While flying over the carnival, they kiss.
