This sequel to the action thriller The Mask of Zorro (1998) begins nine years after the events of the first film, in 1850, as California is voting on whether to join the United States of America as a state. A wild gunman with wooden teeth, Jacob McGivens, attempts to steal some ballots, but Zorro chases after him and recaptures the votes. In their scuffle, McGivens pulls off Zorro's mask.
A pair of Pinkerton agents recognize him as Don Alejandro de la Vega. Zorro fashions a makeshift mask from his costume and rides off on his stallion, Toronado, to deliver the votes to the governor. Upon returning to his mansion, Alejandro is greeted by his loving wife, Elena (Catherine Zeta-Jones). Elena believes that Alejandro can now give up being Zorro, but Alejandro is sure that the people will still need him.
The next day, after sending their son, Joaquin to school, Elena is confronted by the Pinkertons, who disclose their knowledge of Zorro's identity. Soon after, Alejandro is served with divorce papers from Elena, which she was forced to do.
Three months later, Alejandro, living in a hotel, is depressed over the separation from Elena and having not been summoned as Zorro ever since the divorce. His friend and childhood guardian, Father Felipe, convinces him to attend a party at French Count Armand's new vineyard, and there Alejandro finds out that Elena has been dating the count.
Later, after leaving the party and getting drunk, Alejandro witnesses a huge explosion close to Armand's mansion and becomes suspicious of Armand. Afterwards, McGivens and his men attack a peasant family, the Cortezes, who are Alejandro's friends, in order to seize their land deed.
Zorro succeeds in rescuing Guillermo's wife and infant son, but McGivens shoots Guillermo just before disappearing with his gang, the deed to the Cortez home in hand. Zorro subsequently stakes McGivens out at Armand's mansion and discovers that Armand wanted Cortez's land to build a railroad. He encounters Elena, and learns that Armand will receive a mysterious shipment.
Zorro tracks McGivens to a cove where the count's cargo is being delivered. However, on a class trip nearby Joaquin has also come across McGiven's gang and hitches a ride.
Zorro saves his son from the bandits, but the only clues he is able to retrieve are a piece of the cargo, a bar of soap, and the name Orbis Unum from a crate lid. Felipe and Alejandro learn that Armand is the head of a secret society, the Knights of Aragon, which secretly ruled Europe in the past.
Armand plans to throw the United States, which is perceived as a threat to the Knights' power, into chaos before it can gain too much power. Sometime later, Alejandro is captured by the Pinkertons who inform him of their blackmailing Elena into divorcing him and getting close to Armand to discover his plans; since California isn't yet a state, they couldn't conduct a legal investigation.
Joaquin stumbles upon his father's whereabouts and frees him from prison. Zorro heads over to Armand's mansion, meets Elena, and eavesdrops on Armand's meeting, learning that the soap bars contain glycerin - a precursor to nitroglycerin, which Armand plans to distribute throughout the Confederate Army, with the help of Confederate Colonel Beauregard, to destroy the Union.
Zorro and Elena reconcile concerning her involvement with the Pinkertons, and Zorro prepares to destroy the train carrying the explosives. McGivens arrives at Felipe's church to look for Zorro, but ends up shooting the priest and kidnapping Joaquin.
At the mansion, Armand is informed by his butler, Ferroq about Elena's deception and, showing her the bodies of the Pinkerton agents, brutally confronts her with his knowledge. He takes her and Joaquin hostage on to the 10 car train, forcing Zorro to stop his own sabotage and getting himself captured. He is unmasked in front of his wife and son, much to Joaquin's shock.
Joaquin and Elena are taken away by Armand, while McGivens is tasked with killing Alejandro. Unexpectedly, Felipe arrives and helps Alejandro overpower McGivens, who is killed when a drop of nitro lands on his head. Felipe then reveals that the crucifix around his neck shielded him from McGivens' bullet, and Alejandro goes to save Elena and Joaquin.
Zorro catches up with and lands - along with Toronado - inside the 8th car of the train, and engages Armand in a sword fight. Meanwhile, Elena has Joaquin escape into the back cars of the train which she disconnects. She then fights Ferroq in the nitro storage car, and both he and Colonel Beauregard are killed in an explosion.
Joaquin collects Toronado and rides after the train by jumping off the running train. Further along the tracks, under the eyes of a huge crowd, the governor is signing the bill to make California a state. As the train gets closer, Joaquin has Toronado hit a track switch, causing the train to pass around the governor's car. Zorro and Armand's duel takes them to the very front of the locomotive; however, the track is a dead end, blocked by a large pile of rails.
Zorro hooks Armand to the train and escapes with Elena. The train plows Armand into the block, killing him and causing the nitroglycerin to detonate, destroying the train. With Zorro as an official witness, the governor later signs the bill, and California becomes the 31st state of the United States of America.
Later, Felipe remarries Alejandro and Elena with Joaquin as the only witness. Alejandro apologizes to his son for not telling him the truth, and he admits that Zorro's identity is a family secret rather than just his own. Elena then allows Alejandro to continue being Zorro, accepting him of who he is and Zorro rides off on Toronado to his next mission.
