In 2002 in a new lair behind the famous Hollywood sign, Dr. Evil outlines his newest plan to his minions: he will go back in time to 1975 and bring back Johan van der Smut, aka "Goldmember", who developed a cold fusion unit for a tractor beam which Dr. Evil names Preparation H, not to be confused by the well known product of the same name - Preparations A thru G had failed earlier. He intends to use the tractor beam to pull a meteor into the Earth to strike the polar ice caps and cause global flooding. However, moments after revealing this plan Austin Powers and the British Secret Service attack and arrest Dr. Evil. Austin is knighted for his services, but is disappointed when his father, the famous super-spy Nigel Powers, fails to attend the event. At a party to celebrate his knighthood he sings a song with the band Ming Tea; later he meets two Japanese twins named Fook Mi and Fook Yu and is about to have a threesome with them when Basil Exposition informs Austin that his father has been kidnapped, the only clue that the crew of his yacht have had their genitalia painted gold.
In search of answers, Austin visits the imprisoned Dr. Evil, who tells him that Goldmember is behind the abduction. Traveling to 1975, Austin infiltrates Goldmember's roller disco club Studio 69 and meets up with Foxxy Cleopatra (Beyoncé Knowles), an old flame and FBI agent who is undercover as a disco singer. With Foxxy's help, Austin locates his father but is unable to rescue him. Goldmember takes Nigel with him through Dr. Evil's time machine into 2002, and leaves his golden clad henchwomen to kill Austin. Foxxy helps Austin escape, and asks to accompany him to the future in an effort to save his father and exact revenge upon Goldmember for murdering her partner. In 2002, Dr. Evil and Mini-Me instigate a riot in their prison, allowing them to escape. A British Intelligence mole named Number 3 (Fred Savage), who coincidentally has a large mole on his face, informs Austin that the doctor has moved to a new lair near Tokyo a giant submarine shaped like Dr. Evil. Austin and Foxxy fly to Tokyo and confront one of Dr. Evil's henchman, Fat Bastard, now a sumo wrestler. After a humorous fight between Austin and Fat Bastard, Foxxy arrests Fat Bastard who tells them that a Japanese business man, Mr. Roboto, is working on a device for Dr. Evil and Goldmember.
Austin and Foxxy later meet with Mr. Roboto, who pleads ignorance about Nigel's whereabouts. Unconvinced, Austin and Foxxy infiltrate Roboto's factory where the command unit for the tractor beam is being loaded in Goldmember's car, and Roboto hands Goldmember a golden key needed to activate the beam. Foxxy confronts Goldmember while Austin attempts to free Nigel, but Goldmember escapes with the command unit and flees to Dr. Evil's sub. Unable to settle their differences, Nigel and Austin part ways when they disagree on how to deal with the situation. Meanwhile, Dr. Evil's son, Scott Evil, has become increasingly evil in an attempt to prove himself to his father, to the point that he too is going bald. Scott presents his father with sharks with laser beams, a request that had gone unfulfilled in the first film. Dr. Evil replaces Mini-Me with Scott as his favored son; the rejected Mini-Me defects and joins Austin.
Austin, Foxxy and Mini-Me infiltrate the sub, but Austin is captured. Dr. Evil prepares to activate the tractor beam, but Foxxy has stolen the key and frees Austin. Austin prepares to shoot Dr. Evil, when Nigel appears and reveals Dr. Evil and Austin are brothers, separated when they were toddlers when an assassination attempt killed their mother, and Dr. Evil was found and raised by Belgians. Dr. Evil and Austin embrace, enraging Scott, who flees to pursue his own vengeance, whilst Goldmember commandeers the tractor beam's controls, unzipping his pants to reveal his gold-covered genitals to be a spare key. Goldmember activates the tractor beam, but Austin and Dr. Evil work together to reverse its polarity, destroying the meteor and saving the world. The heroes arrest Goldmember, who turns to the camera to reveal the entire string of events was adapted into a film by Steven Spielberg, starring Tom Cruise as Austin, Kevin Spacey as Dr. Evil, Danny DeVito as Mini-Me, and John Travolta as Goldmember. Austin, Foxxy, Dr. Evil, Mini-Me and Nigel are in the audience of a Hollywood theater watching the film. Upon exiting the theater they bump into Fat Bastard, now normal size thanks to the Subway diet. As Austin and Foxxy kiss, in Dr. Evil's Hollywood lair, Scott now completely bald, dressed like and laughing in a manner similar to his father declares he will get his revenge on Austin and begins dancing like the singer Michael Jackson.