The movie begins with a narration sequence explaining what happened in the previous film. After the opening credits, the film begins in Los Angeles, California, where at Cheatum Studios, Kelvin Cheatum (K-von Moezzi) is trying to save his studio from bankruptcy by announcing an outrageous slate of genre films that will have horror hounds drooling: Hamburger Time Traveler Detective, Space Spankers 2015, and the ninth entry of his father's famous killer puppet franchise Tiny Terrors; however, things aren't going as he planned: all of the cast/crew members on the set are unhappy with Kelvin making them work 24/7 without pay, and someone who goes by the name of "Demon Warrior 13" is keeping the films from being sold. A 27-year-old handicapped man, Tommy Hines (Joseph Porter), comes to the studio unexpectedly with his head tour guide, Heather Crocker (Kelsey Sanders), because his final wish before he dies is to take a look around the studio and meet the star puppets of the Tiny Terrors franchise.
Meanwhile, Polly Bonderhoof (Michelle Bauer) receives special baked goods from her sister in Waco, Texas, and one of the baked goods is the Gingerdead Man (voiced by John Vulich). After escaping from the pastry box, the Gingerdead Man needs to find a way to transfer his soul into a human body, and he finds a spell book in the prop room and he finds a way: Transmigration of the soul. All he has to do is kill five people, then he has to kill a sixth victim (a virgin) and has to drop one blood from the previous five victims on the points of an evil pentagram. So the Gingerdead Man starts killing people off one by one, until he is stopped by Tommy. It turns out that Tommy is "Demon Warrior 13", and that he has been e-mailing reviews to Kelvin warning him about the movies being bad, but he hasn't been responding because Kelvin's company doesn't take unsolicited mail. So Tommy ties Kelvin and Heather up and starts re-acting a scene fromTiny Terrors 9: Purgatory of the Petite that involves killing both of them with a dagger.
Suddenly, the Gingerdead Man stabs Tommy from behind, and goes to continue the Transmigration. But the Gingerdead Man made two mistakes: He did not add a drop of blood from the previous five victims on the points of the pentagram, and he accidentally let Tommy bleed across the whole pentagram, instead conjuring another spell: bringing dolls to life. And soon, the dolls from the set of Tiny Terrors come to life and start attacking the Gingerdead Man. They take a cross that was hanging from the set of the movie, and they hammer him to it,and burn him, making him look like Jesus Christ's death. Then, one of the actors from the movie Sir Ian Cavenaugh (Jacob Witkin) comes in and shoots all of the puppets with an AK-47, saving Kelvin and Heather's life. However, it appears that Tommy recorded the whole scene.
The film ends with Kelvin using the footage for Tiny Terrors 9 and wins an award for Best Horror Hand Puppet Motion Picture, he and Heather get married, and they live happily ever after. That is, until a hobo (Adam Green) comes across the burned Gingerdead Man in a garbage can, and desperate for food, takes a bite out of him, and suddenly he turns into the Gingerdead Man.