The film is set in New York City in 1939. The moment his zeppelin docks in New York, Dr. Vargas (Julian Curry) sends a pair of bullet-like metal vials to Dr. Jennings, another scientist; within moments, Dr. Vargas is gone and his name is crossed off a list.
Dr. Jennings (Trevor Baxter) arranges to meet reporter Polly Perkins (Gwyneth Paltrow) during a showing of The Wizard of Oz (1939) at Radio City Music Hall. They discuss the disappearance of the world's top scientists, and he reveals that he knows who will be next: himself. He hints that he and the missing men have a connection, and whispers the name of the man behind the disappearances: Totenkopf. (Totenkopf is German for death's head.) Jennings drops a blueprint, which Polly picks up.
Polly's return to the office is sidetracked when New York is invaded by flying robots that shoot laser rays out of their heads and crush people and property under their enormous feet. The overwhelmed military broadcasts a call for help to someone called Sky Captain. As Polly runs along the streets photographing the robots and gathering information for a story, Sky Captain (Jude Law), a.k.a. Joe Sullivan, appears in his Warhawk airplane, which is equipped with amazing high-tech modifications, to fight the monsters. He trips up several robots and the rest are driven off. Joe has one of the downed mechas taken to a base near New York, home of his mercenary air force, and turns it over to his gum-chewing technical expert Dex (Giovanni Ribisi). Polly follows and surprises Joe in his office. Polly and Joe have a back-story; they were an item some years before in Nanjing, but split up amid suspicions on her part that he was cheating and on his that she sabotaged his plane. Polly uses Dr. Jennings' blueprint, which turns out to be a plan for the killer robots, as leverage to convince Joe to work with her -- and let her ride along when he goes after the robots.
First Polly and Joe go to see Dr. Jennings in his laboratory, but they arrive too late. He's been attacked by a mysterious woman in black (Bai Ling), who escapes from Joe while Polly speaks to the dying scientist. Jennings gives her the two metal vials he received from Dr. Vargas and says that if Totenkopf acquires them, he'll destroy the world. He dies before he can explain.
Back at Joe's base, the robots attack again. Joe, following Polly's directions, leads them on a nearly street-level flying chase through Manhattan while Dex tries to trace the source of the robots' control signal. Joe throws off the pursuing robots by diving his plane into the ocean. Polly's sure they're going to die, but the plane can function as a submarine so they're able to resurface and fly back to base. They arrive in time to exchange fire with a departing squad of robots lead by the mysterious woman in black. The robots have taken Dex, but a brief search reveals that Dex left a clue. Stuck to a downed girder with bubblegum is a scrap of map on which he marked the source of the control signal: a remote valley in the Himalayas. Joe and Polly take off immediately to get Dex back.
In Nepal Kaji (Omid Djalili), a contact of Joe's, reluctantly agrees to take them to the valley of Shambala. He notes that in Hebrew it's called Eden, "and you may know it as Shangri-la." A trek through the snowy mountains with Kaji and a couple of guides brings them to an old mine, where the guides trap Polly and Joe in a vault rigged with dynamite and make off with the metal vials, which Polly had never mentioned to Joe. Kaji finds them and lets them out in time to save their lives, but not Polly's extra film. (She has only two shots left in her camera and spends the rest of the movie agonizing over how to use them.) The explosion knocks them out and the three of them wake up naked in a large, richly appointed bed. A Nepalese monk comes in and tells them (via Kaji) that they are in Shangri-la. He agrees to help them when they say that they're after Dr. Totenkopf. Totenkopf had forced the people of Shangri-la to work in the "poisoned mine" -- a uranium mine -- and all but one of the miners have died. They ask to speak with the survivor, who gives them a cane that he says will guide them to Totenkopf's base. In return for this favor, the horribly disfigured miner asks them to kill him.
Back in the plane, Joe and Polly use the inscriptions on the cane to plot a course to Totenkopf's location, which Joe marks with an X on the map. Then he makes another X, somewhat closer to them than the first. "What's that point there?" asks Polly. "That's where we run out of fuel," Joe replies. Joe radios a message to his old friend Franky, who commands a secret British airborne air base where he hopes they can refuel. Shortly after the plane's tank runs dry and they begin a gliding descent, the air base materializes out of the clouds and they're able to land safely.
Franky turns out to be Commander Francesca Cook (Angelina Jolie), who Polly realizes must be Joe's other woman when Franky mentions Nanjing. She leads her amphibious squadron to escort Joe and Polly to the island they've identified as Totenkopf's hideout. Franky and her squadron distract the robot guardian of the hideout's underwater entrance so that Joe's plane can slip through. As they disembark, Polly sees the registration number on the fuselage reflected in the water: h-110d, inverted, reads "polly." She doesn't say anything to Joe.
In the island's huge underground base, a spaceship is being loaded with animals. (Joe is astonished that Polly doesn't find this spectacle worthy of her last remaining frame of film.) Dex turns up in a kind of flying flat-bed truck to rescue Joe and Polly from some of Totenkopf's robots. Dex has also rescued several of the scientists who disappeared. They tell Polly and Joe that the spaceship is meant to give life a fresh start on a new world that Totenkopf calls the World of Tomorrow. In addition to the animals, the ship will carry the mysterious vials, which contain genetic material for a new, improved human race -- Totenkopf's Adam and Eve. However, after the ship takes off its booster rocket will destroy the Earth.
The group locates Totenkopf's quarters, but they're booby-trapped, and one of the scientists is electrocuted trying to get in. The booby-trap triggers a projection of the head of Dr. Totenkopf (Laurence Olivier), a la the Wizard in The Wizard of Oz (1939). Totenkopf condemns "a world consumed by hatred and bent on self-destruction." He concludes, "I am the last desperate chance for a doomed planet. Now, leave this place or die!"
Dex disables the booby-trap and the party enters the villain's study to find Totenkopf's dessicated, long-dead corpse clutching a note that says "Forgive me." Joe, deciding that he'll have to board the spaceship to stop it, first socks Polly in the jaw -- if she's unconscious, she can't insist on coming along and she'll be safe. As he attempts to get inside the ship, he's attacked by the woman in black, who turns out to be a robot. Polly turns up to save him, and gives him a sock in the jaw for good measure.
Joe and Polly go aboard and cross a narrow bridge over the deep, hollow core of the ship to reach the controls. The rocket takes off and begins a countdown toward the release of the booster stage, which will destroy the planet. As Joe and Polly struggle to turn off the booster, the robot in black attacks again. Joe fends her off and uses her raygun to disable the booster. He and Polly get away in an escape pod just before the rocket blows up without harming the Earth. They land in the water, surrounded by pods containing animals from Totenkopf's space-ark, which Polly released before they disabled the booster. Polly pans around in search of an image for her final photograph and finally settles on Joe. After she snaps the shutter, he looks disturbed. Polly: "You don't have to say anything." Joe: "Lens cap."