Billy and Sheena are back, and once again visiting their marine biologist uncle, Dr.D. He is searching for a sunken pirate ship, the Scarlet Skull, which vanished in a black cloud back in the 1780s, along with millions of dollars worth of gold and jewels. While onboard their submarine, the Deep Diver, the trio pass through a black cloud themselves, which causes a temporary loss of power and somehow relocates Dr. D away from the submarine. After he vanishes, the sub crashes into a ship that turns out to be the Scarlet Skull, and is promptly attacked by Zombie pirates.
After making it back to the surface, Billy and Sheena leave the sub and swim to a nearby island. Billy's leg is injured in leaving the sub, forcing him to use a piece of driftwood as a crutch. However, they soon find the zombie pirates and fall into a pit. They manage to escape with help from the driftwood, but are captured by the pirates and taken before their captain, Long Ben one leg, who has captured Dr. D and demands they return what is his.
Thinking he means the treasure, Billy and Sheena go to find it, only to run into a couple of strangers, Roger Baldry and Goldy Munroe, who claim to be photographers and help them in bringing the treasure back to the surface. However after bringing the treasure up, the two turn out to be zombies as well, the original owners of the treasure before Captain Long Ben One-Leg and his crew stole it from them. The pair explain they dove into the black cloud as well after giving chase, and have been hoping to get the treasure back ever since. They then throw Billy and Sheena overboard.
Roger then touches a red jewel in the shape of a skull on the treasure chest, only to find that it's a trap: both he and Goldy are turned to ash by it. With the two pirates gone, Billy and Sheena return to their boat, and then to the Cassandra (Dr. D's boat). However, moments later, the Scarlet Skull rises from the depths, with Captain Ben and Dr. D aboard it. Billy and Sheena try to return the treasure, only to find that Captain Ben isn't after the treasure: he wants his leg, the "driftwood" Billy has been carrying around. Billy returns it, by throwing it like a spear at him, knocking the captain overboard. The Scarlet Skull falls apart without its captain.
After Dr. D climbs aboard, the trio pass through the black cloud again; which Dr. D explains had transported them into a Dead Zone, the realm of the dead. Passing through it, they return to the land of the living -- only to find the chest has disappeared, leaving only the red skull, which is now powerless. However, as Dr. D tries to reach someone on the radio, they hear the pirates over the transmission.
Later that summer they receive a surprise invitation to HorrorLand, they were psyched but again the tides begin to turn when two girls named Britney and Molly disappeared, a boy named Matt is chased by the Monster Police and then Billy was positively horrified when his sister Sheena became invisible and then she DISAPPEARED!