Damian, the new Robin, is upset by his failure at trying to stop The Joker the previous evening, making his humiliation of falling off a building and having to be saved by Batman worse because it was caught by a video blogger and posted on the World Wide Web.Alfred Pennyworth tries to assure him that he’s still learning, though Damian wishes he could talk to someone else who has been through the Robin training as Red Robin is away with his team. Batman arrives as Damian is studying Batman’s enemies, and comes across Penguin, who he has never met.
In the Arctic, Penguin, who has been in exile following the events of Batman Unlimited: Animal Instincts, is depressed at having lost everything. His only companion is Buzz, a penguin who seems to understand Oswald’s predicament. His roommate, the isolationist-scientist Mr. Freeze, tries to repel a group of oil drillers near his ice cave, using one of his inventions to turn an isopod into a gigantic monster to attack them. The Drillers use a new laser-drilling sled to attack the monster, and in the process, damages Freeze’s invention, turning the monster back into an isopod, which causes Mr. Freeze to depart in anger. Penguin sees a way to capitalize on this, and encourages Mr. Freeze to take him back to Gotham City where he assures Mr. Freeze the means to achieve his goals.
Back in Gotham, Bruce and Damian are attending the new Technology Showcase at Wayne Tower where Dr. Kirk Langstrom is unveiling a new single-operator drilling mech which can melt rock in order to mine more easily. Bruce receives a call from Alfred that someone is attempting to break into Arkham Asylum. Oliver Queen, who is present at the showcase, sees them leave and follows them.
At Arkham, Penguin and Mr. Freeze drill into the asylum and freeze the guards, then bypass several inmates such as Cheetah, Mad Hatter, and Two-Face, before freeing Bane, Chemo, Killer Croc, and Clayface. They also pass Joker on their way out who is upset that Penguin refuses to free him as well. Batman, Robin, and Green Arrow arrive and battle the villain, only to have Mr. Freeze and Bane successfully pull an escape with their allies.
At the Batcave, Batman tries to figure out what they’re up to, but comes up empty while comparing MO’s and criminal histories. Robin figures out that there is a pattern based on what three of the villain’s chemical altered DNA. Bane’s Venom, Clayface’s Mud, and Chemo’s acid. Killer Croc would make a great test subject. Batman uses this to track down their chemical signatures. Meanwhile, in their undersea cave hideout, Mr. Freeze uses Bane’s venom, Clayface’s shape-shifting mud, and Chemo’s toxic acid to create a formula to transform Killer Croc into a gigantic ice-spewing mutant. He does the same to Chemo. This time, Mr. Freeze gives him a liquid nitrogen blaster. Killer Croc emerges from the sea sucking up water and blasts Gotham with his ice breath, turning the city into a frozen wasteland.
Batman and Robin see the mutated supervillains, and attempt to stop Croc and Chemo with the Batmobile and Batplane, but proves to have little success. The Flash, Nightwing and Green Arrow are saving citizens as best they can while Croc attacks the Gotham City Police Department headquarters. Despite their best efforts, the police can’t stop Killer Croc. Meanwhile, Mr. Freeze and Penguin turn on each other, both wanting to eliminate their rivals for control of Gotham. However, Penguin’s henchbird Buzz has stolen Mr. Freeze’s formula, which Bane and Clayface use inject in themselves to turn themselves into mutants. Mr. Freeze is easily dispatched and Penguin sends Bane and Clayface after Batman. Bane, however, has a score to settle with Croc, who sold him out to the Gotham Police, and attacks the giant mutant. Clayface locates Batman and Robin and attacks them, only to have Freezes formula alter his body, turning him into a giant lava monster.
Batman gives the Batmobile to Robin and tells him to distract Clayface’s lava monster form, while he goes to Wayne Enterprises to get a special project Langstrom has been working on: a BatMech the same size as Croc and the others. Green Arrows arrives and reveals that he had Langstrom build a mech for him, which Langstrom states that he received a contract from Queen Industries for research and development. Batman goes to deal with Croc and Bane, while Green Arrow goes to deal with Chemo. Batman then sends Langstrom to go help Robin, who was unable to stop Clayface’s lava monster form, and the others build a special laser cannon to stop Clayface’s lava monster.
The two heroes engage the trio of monsters, Batman defeating Killer Croc and then facing off with Bane, while Green Arrow manages to barely hold his own against Chemo’s toxic attacks. Meanwhile, Mr. Freeze, racked by guilt over his manipulations and betrayal by Penguin, aids the heroes in perfecting their cannon to use against Clayface’s lava monster form. After Batman defeats Bane, he goes to help Green Arrow battle the more powerful Chemo. Working together the pair manage to defeat Chemo and drain the chemicals out him, deactivating him. Mr. Freeze, though injured by Clayface’s lava monster form, is able to get the freeze ray to work and freezes Clayface’s lava monster form solid.
Penguin and his cohorts are arrested, along with Mr. Freeze who admitted that he was responsible for Gotham’s icy conditions, and sent to Arkham while Buzz the penguin is sent to a zoo where he meets a female penguin fall in love with him. In Arkham Aslyum, Joker gets even with Penguin for leaving him in Arkham instead of freeing him by beating him up. Chemo’s fate is unknown.
The other heroes leave the Batcave and Batman congratulates Robin on doing a good job. Damian feels better in his role as Robin than he did before.
The movie ends with a regular-sized Clayface escaping his icy-prison and slinking into the sewers.